51% In 6 Steel Firms Would Cost Just Rs 1100 Crore

Compare this: Six years back Tata Steel was planning to set up a 10 million tonne steel complex at an estimated investment of Rs 7,000 crore. Today, Tata Steel, the only profit making steel company in the country, can buy out 51 per cent in each of the remaining big six -- SAIL, Essar, Ispat, Jindal Vijaynagar Steel, Jisco and Lloyds -- for less than Rs 1,100 crore.

The six steel majors put together have an installed capacity of almost 17 million tonne and industry officials say a greenfield unit of a similar size would cost nothing less Rs 20,000 crore, possibly even more.

Tata Steel, which posted record profits last year at Rs 553.44 crore, has reserves of Rs 4,380 crore. With its debt-equity at just 0.95, the steel major is in a comfortable position to leverage debt if it were to go ahead with such an acquisition drive.

Though Tata Steel has said it will aggressively participate in consolidation in the domestic steel sector, the above comparison is purely hypothetical to illustrate the current state of the industry.

Loss-making public sector major SAIL, which has a total saleable steel capacity of 9.7 million tonne, would be the most expensive with a total market capitalisation of over Rs 1,652 crore at current prices. Its scrip is presently languishing at Rs 4 on the Bombay Stock Exchange. SAIL also has the largest equity base at Rs 4,130 crore.

The shares of the remaining five are faring almost as poorly: Essar Steel was at Rs 2.60, JVSL at Rs 2.40, Jisco at Rs 5.30, Ispat Industries at Rs 0.85 and Lloyds Steel at Rs 0.70 on the BSE. The five companies put together have a combined market cap of nearly one third to that of SAIL, or around Rs 506 crore, with JVSL alone accounting for Rs 324 crore.

In comparison, the market capitalisation of Tata Steel is over Rs 2,630 crore. However, it has not been faring well on the bourses, with its stock ruling at Rs 70-75 levels, marginally higher than the 13-year low of Rs 67.55.

The sorry state of the domestic steel industry can also be gauged from the fact the compounded annual growth rate (CAGR) of profit after tax of the industry in the last five years is a negative (-) 33 per cent, whereas the total manufacturing sector experienced a growth of 2 per cent.

It is not difficult to comprehend the reasons for the abysmal condition of Indian steel companies. Internationally, prices of hot rolled coils -- the largest traded category of steel -- have plummeted by more than 25 per cent in the last one year.

With domestic rates being dictated by price movements in international markets, flat products at home have witnessed a 30 per cent fall in prices since their highs two years ago.

Moreover, in the last five years, while the total cost, including the administrative cost, of domestic steel companies have jumped by nearly 15 per cent, steel prices have declined by nearly 5 per cent.

The Indian steel industry has invested more than Rs 60,000 crore in new plants and equipment since 1990, resulting in the glut situation. The average cost of production of Indian steel is still less than that in the US, Canada, France, UK, Germany or Japan. The labour cost in India is less than $3 per hour, which is far lower compared with international standards.