Bhushan Steel's market share, big customers attractive bet for JSW Steel

Bhushan Steel's major stake in an Orissa Sponge mine also makes it attractive to JSW Steel

Much before Parth Jindal said that JSW Steel was keen on Bhushan Steel, the Sajjan Jindal-controlled company had made an unsolicited offer to lenders to take over around Rs 22,000 crore of its debts.

Towards the end of January, JSW had approached lenders with a proposal that included taking over a part of Bhushan Steel's debts, which stood at Rs 44,477 crore in FY16. Bhushan Steel's management, which was discussing a loan recast with lenders under the Reserve Bank of India's (RBI's) Scheme for Sustainable Structuring of Stressed Assets (S4A), however, was not on board with the proposal. Much water has flown under the bridge since then.

The RBI has recommended insolvency for 12 stressed accounts, including Bhushan Steel, under the Insolvency and Bankruptcy Code (IBC). Bhushan Steel's case is now being heard in the National Company Law Tribunal (NCLT). However, JSW Steel has made it quite clear that it is keen on bidding for the company. What exactly makes Bhushan Steel an attractive bet for JSW Steel? Parth Jindal had recently said that Bhushan Steel was preferable because of its location. 

Jayanta Roy, senior vice-president and group head, corporate sector ratings, ICRA, said that Bhushan Steel's operating profitability, which stood close to 20 per cent in the second half of 2016-17, was healthy for a non-integrated player. "Additionally, a presence in the mineral-rich state of Odisha and a number of reputed clients, especially in the automobile and white goods industries, could be added attractions for a potential buyer. The company has also bagged an iron ore mine in Odisha in an auction conducted recently."

According to Bhushan Steel's 2015-16 annual report, the company is a long-term supplier to Maruti Suzuki, Tata Motors, Honda, Mahindra & Mahindra, and Ashok Leyland. In fact, it was one of the first companies to supply outdoor skin panels for automobiles in the late 1990s when such goods were largely imported. In the consumer durables space, its customers include LG, Samsung, Videocon, and Haier.

Sources close to Bhushan said that in the consumer durables space, it has an 80 per cent market share, while in the supply of auto grade steel, it has a 40 per cent market share.

All these advantages apart, Bhushan has a significant stake in a company called Orissa Sponge Iron & Steel Ltd, which has a high-grade iron ore mine. The reserves of the mine are around 122 million tonnes and it has a life of around 15 years. Monnet Ispat & Energy Ltd, the other company that JSW is eyeing, also has a stake in Orissa Sponge.

The shareholding of Orissa Sponge is, however, a matter of dispute between Monnet Ispat and the board of Orissa Sponge and the matter is before the NCLT.

JSW's latest annual report says that backward integration and raw material security has always been important to the company's strategy. 

The company has secured the Moitra coking coal block via an auction process. The mine has extractable coal reserves of around 30 million tonnes and is in an advanced stage of development.

JSW has also won five mines in the auctions of C-category iron ore mines in Karnataka. Of these, two mines will be operational by the first half of FY18 and the remaining three will be operational by the end of FY18. All five iron ore mines are expected to produce 4.7 million tonnes per annum. The Orissa Sponge iron ore mine is much bigger than all of these put together, indicated sources.

What remains to be seen is that once the bidding process starts for Bhushan, who else bids for the company apart from JSW. SBI Caps, on behalf of the lenders, had been tapping potential investors even before the insolvency proceedings started.