Global cues and delay in IBC may hit valuation of stressed steel assets

In terms of bids, for Essar Steel, ArcelorMittal has offered Rs 420 bn on dues of Rs 490 bn. For Bhushan Power & Steel, JSW Steel has offered Rs 193.50 bn on dues of Rs 470 bn

Global cues and delay in completing transactions through insolvency and bankruptcy process may impact valuations of stressed steel assets.

Most of the steel assets facing insolvency proceedings are expected to be completed either by the end of the current fiscal year, a bidder pointed out.

Some of the companies on the Reserve Bank of India's (RBI's) second list have just started with the process and even if they stick to the deadline it would take 180 days, and on an extended timeline, 270 days. Others on the list are yet to make a start.

But experience from the first list has indicated that the timeline is not adhered to, said a bidder. In some of the steel cases, the timeline has exceeded by more than a year.

“No one knows how the next year is going to pan out. It is expected that valuations for assets will remain within realistic levels from now on," one of the bidders said. “When the new insolvency process started for NPA (non-performing asset) resolutions, it was widely expected that many stressed steel assets would require a haircut of more than 50 per cent to make them financially viable. However, two years down the line, we have seen some large steel assets get substantially better bids from steel majors,” said Icra Senior Vice-President, Jayanta Roy.

Among the five steel assets on the RBI’s first list of NPAs, three have been resolved. The haircut in Bhushan Steel was much lower at 37 per cent.

In terms of bids, for Essar Steel, ArcelorMittal has offered Rs 420 billion on dues of Rs 490 billion. For Bhushan Power & Steel, JSW Steel has offered Rs 193.50 billion on dues of Rs 470 billion.

Besides the inherent strength of such assets, Roy said, the ongoing upturn in the steel cycle, too, seems to have influenced companies to make aggressive bids. Therefore, the extent of haircut will depend upon the expectation on the health of the steel industry, which will continue to exhibit a cyclical trend, he said.

The longest upturn in steel cycle has been since 2002 till the financial crisis broke out in 2008. That, however, was singlehandedly driven by China, on account of the Beijing Olympics.

The upturn is now in the second year. So far as the domestic market is concerned, the first quarter numbers were impressive and the second quarter stable.

Domestic steel consumption grew at 9.2 per cent year-on-year in the first quarter, compared with 7.9 per cent in FY18. In the first half of the year, however, the demand was at 6.6 per cent to 7 per cent.

Steel companies said prices in the current month were rolled over. But that’s not much of a concern after consecutive hikes. However, the global market has shown some signs of softening with some steel mills being unable to pass on the price hikes.