High values of stressed steel assets reflect uncertainty over greenfield

The valuations fetched by the larger stressed steel assets — Bhushan Steel and Bhushan Power & Steel — are partly a reflection of the uncertainty associated with greenfield projects in India.

So far, JSW Steel’s offer of Rs 193.5 billion for Bhushan Power & Steel, which has a commissioned capacity of 2.3 million tonnes (mt) of steelmaking, is the highest. However, though Bhushan Power’s commissioned capacity is 2.3 mt, it has a planned capacity of 3 mt. Also, Bhushan’s promoters had earlier submitted a plan to ramp-up capacity to 5 mt.

JSW revised its bid from the earlier Rs 110 billion to Rs 193.5 billion recently, as it believed that Bhushan Power would be an important cog in its target to achieve a capacity of 40 mt.

“Steel demand in India has grown at over 9 per cent in the first quarter of FY19, and the growth outlook remains positive for the rest of the year. JSW Steel’s revised bid for Bhusan Power & Steel is at a premium over the weighted average capital cost per tonne for its ongoing brownfield expansions at various plants. However, if Bhushan Power & Steel’s capacity can be augmented further at a lower cost, the overall cost for the acquisition on a per tonne basis may come closer to the same for JSW’s brownfield expansions,” said Jayanta Roy, senior vice-president, Icra.

JSW Steel has a greenfield project planned in Paradip, Odisha, but industry sources said, the handover of land for the project is unlikely in the next two years. JSW wants to set up a mega steel plant at Paradip but that is unlikely to take shape in the next 5-6 years. Meanwhile the company wants to retain its leadership position in the domestic market, while getting a toehold in the east.

The upturn in the steel cycle is already in its second year, pointed out Sushim Banerjee, director-general, Institute for Steel Development & Growth. Companies do not want to miss out on this good phase.

Tata Steel acquired Bhushan Steel under the Insolvency and Bankruptcy Code (IBC). The deal translated into a recovery of Rs 352 billion for lenders.

At the time of the acquisition, Tata Steel had said it was an attractive proposition, compared to the capital cost, time and uncertainty associated with the alternative of building a greenfield steel plant, coupled with the asset quality and downstream capability of Bhushan Steel, apart from the proximate synergies with Tata Steel.

Tata Steel would know, given that it commissioned Kalinganagar, one of the few greenfield projects to be commissioned in the last decade; commercial production started in May 2016. But Tata Steel had signed the MoU with the Odisha government for setting up an integrated plant in 2004.

According to industry sources, 60 per cent of the capacity addition in the last decade has been through brownfield route. During the boom time of 2005-2006, a slew of MoUs were signed and greenfield projects totalling 100 million tonnes were announced that included Posco and ArcelorMittal. But land woes and raw material linkages tripped most of these projects.

Going forward, most of the the capacity addition that is on the radar, is also through brownfield expansion.