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Lenders prepare Monnet Ispat for recovery

Talks to sell the power plant in Odisha to JSW Energy are in final stages and strategic buyers have been identified for its steel business

Aditi Divekar  |  Mumbai 

Lenders prepare Monnet Ispat for recovery

A hostile business climate leaves debt-laden Monnet Ispat & Energy no choice but to look for a strategic buyer. Last month, lenders took control of the company and decided to convert their loans into equity under the Reserve Bank's strategic debt restructuring guidelines announced in June. The lenders plan to sell their holdings to a buyer within 18 months. Till then, the existing management will continue to run Monnet Ispat.

The flagship company of Monnet Group mines coal and manufactures sponge iron and other steel products at Raipur and Raigarh in Chhattisgarh. The company's consolidated net debt stood at over Rs 12,000 crore on March 31, 2015, with 21 per cent of the loans taken for the power business and the rest for steel. The company's debt-equity ratio has zoomed to 4.71 in 2014-15 from a healthy 1.25 in 2010-11.

"We are not concerned about the power business because talks to sell the power plant in Odisha are in the final stages," a lender to Monnet Ispat told Business Standard. "Our concern is the steel business, which carries the majority debt. Looking for a buyer for this business is not going to be easy," he adds.

Monnet Ispat through its subsidiary Monnet Power is an independent power producer with a 1050 MW thermal power plant in Angul, Odisha, among the cheapest electricity generating units in the world. Sajjan Jindal's JSW Energy is in talks to buy a controlling stake in Monnet Ispat's power business, which carries a loan of about Rs 4,000 crore.

Lenders prepare Monnet Ispat for recovery
"The strategic debt restructuring is only for the company's steel business. Once the power business is sold, that much debt will get off the books," the banker says. Although Monnet Power may find a buyer in JSW Energy, its coal mine benefits will not be available after the surrender of the Utkal C block. On May 26, a court had recorded the surrender of the block by Monnet Power after the government capped the fixed costs a power plant could factor into electricity tariffs. The company had argued that capping fixed costs after auction of coal blocks amounted to retrospective changes in bidding conditions.

The deal with JSW is more of a family transaction because Jindal's sister Seema is married to Monnet Ispat Chairman Sandeep Jajodia. Jindal has a history of rescuing family members, JSW Steel had in 2007 acquired a plates and pipes mill in the US from brother Prithviraj Jindal's Jindal SAW.

"We have identified nine strategic buyers for the steel business," a senior executive at Monnet Ispat says. "Three are Indian companies, another three are foreign and the rest are private equity firms," he adds. Monnet Ispat has the capacity to produce 1.5 million tonnes of hot rolled plates, rebars and structure profiles at Raigarh. It is also the second largest sponge iron manufacturer in India.

Not many Indian have the brawn to take on Monnet Ispat's debt. Nearly three-quarters of the Indian steel industry is heavily indebted. With steel demand low, few can afford the further risk. "Monnet Ispat has nothing in terms of raw material security like coal or iron ore. Finding an overseas buyer will not be easy," says an analyst with local brokerage.

The Supreme Court's decision to de-allocate all coal mines had hit the company, Jajodia had said in the Monnet Ispat annual report for 2014-15. Monnet Ispat lost five coal mines in the process.

But the company is optimistic about response from private equity firms. "Europe is not doing well, the Chinese slowdown is known and Japan's business confidence is flat. India seems the only option for investment. There is good scope for private equity firms to come to India," says a Monnet Ispat executive. "If the safeguard duty on imported steel is extended, it will become easier to do business in India," he adds.

Analysts are not so sure though. "Private equity firms had to exit Monnet Ispat at a loss. Its record with private equity firms has not been good," warned an analyst. Blackstone holds a 6.94 per cent stake in Monnet Ispat and is sitting on a loss. Blackstone also has a stake in Monnet Power, which had big expansion plans that have not seen the light of the day. The company had planned a 2,000 MW power plant along with a 100 MW solar power plant. In July, another private equity firm CX Partners sold its stake in Monnet Ispat at a loss.

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First Published: Thu, December 31 2015. 21:10 IST