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| Sesa Goa plans Rs 9k-cr steel foray |
| Surajeet Das Gupta / New Delhi Aug 30, 2010, 00:32 IST |
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Iron-ore mining company Sesa Goa has finalised a blueprint to diversify into steelmaking with an investment of Rs 6,000-9,000 crore, in Orissa and Jharkand. The move is significant as the company is already under fire from shareholders for announcing a public offer to buy up to 20 per cent stake in Cairn India.
 The Vedanta group, of which it is a part, recently announced that it would buy 41-60 per cent from Cairn Energy in its Indian operations. Shareholders of Sesa Goa have criticised the management for investing in an unrelated business area, which led to the share price of the company to tank on the bourses.
Sesa Goa recently wrote to the Orissa government to transfer a memorandum of understanding signed earlier with Sterlite Iron & Steel Company, which is part of the Vedanta group, to set up a steel plant in the state. The project would now be executed by Sesa Goa. While the MoU was for a plant with a capacity of 5 million tonnes per annum, Sesa Goa is planning to initially set up a smaller 1.5-million tonnes capacity.
The company is in the process of scouting for a steel company as an equity partner for the project. Sources said Sesa Goa plans to oversee the mining aspects of the project, while the JV partner would run the steelmaking operations.
Sesa Goa has signed another MoU with the Jharkand government to set up a 1-1.5-million tonne pig iron plant, which would include a power plant. However, it now planning to upgrade the project and also manufacture long products as well. Sesa Goa proposes to bring in a strategic investor to run the steel side of the business here, too.
 Sources said the Rs 6,000-9,000 crore investment required for both these projects would be raised through Sesa Goa’s internal accruals.
While company Managing Director P K Mukherjee declined to comment on its diversification in steelmaking, he allayed fears that it would not have any cash after investing in Cairn. Mukherjee said the Sesa Goa balance sheet is strong enough to raise money for diversification or for the acquisition of more iron-ore mines.
With a net worth of Rs 8,000 crore, the company currently has only foreign currency convertible bonds of Rs 1,000 crore, which will soon be converted into equity. “We can easily raise another Rs 7,000 crore on a debt-to-equity ratio of 1:1. We can also borrow against the 20 per cent equity that we will acquire in Cairn Energy. So, we don’t have any problem of raising resources,” said Mukherjee.
Explaining why his company is not looking to acquire more iron-ore assets at this time, Mukherjee said: “With most companies expecting iron-ore prices to remain firm, the asking price for a deal is too high. That is why we are waiting for the right opportunity.”
Mukherjee also pointed out that criticism from some quarters about diversifying into unrelated areas of business is not justified. “There are many groups in India that manufacture everything from salt to steel and are in unrelated areas, and have made a success of each of them,” he said.
Defending his decision to invest in the equity of Cairn India , Mukherjee said he estimated a 15 per cent annual return on the cash the company is going to put into Cairn, which is much higher than what it earns currently from its reserves. “We have about Rs 9,000 crore in cash, and by the beginning of next year this will go up to Rs 12,000 crore. At the moment, this money earns us a return of 4.5 per cent on average through investments. However, when the money is invested in Cairn, our returns are expected to be around 15 per cent, which will go directly to our bottom line. So, the deal is EPC accretive,” said Mukherjee.
Sesa Goa will invest Rs 14,000-15,000 crore in Cairn India, which will be funded by its cash reserves as well as a small bridge loan of around Rs 2,000-3,000 crore. It hopes to pay this off in six months.
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