Role of financial institutions in make in steel

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Address on
Role of financial institutions in Make in Steel
At
India Steel Summit
Hotel Taj Diplomatic Enclave
(9th November 2017)
by
Dr. Saurabh Agarwal
Professor and Dean, Indian Institute of Finance, Delhi, INDIA
Managing Director, Edge India Publishing Pvt. Ltd., Delhi, INDIA
Saurabh Agarwal, Role of financial institutions in Make in Steel

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Changing Scenario in Steel Sector
Steel companies have taken on an increasing amount of debt as
they sought to capture or sustain market share
As a result, the global steel sector currently has about 700mt of
excess production capacity and low capacity utilization
(approximately 70%), which indicate that there is at least 15% of
capacity, built at an investment of US$300b–US$350b that could
be closed.
Introduction

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Consequently, margins have shrunk and with a limited free cash
flow, companies have turned to taking loans to finance their
operations
As a result, leverage has steadily increased since 2008
We have also seen an increase in total debt as a percentage of
total company assets, indicating that assets financed through debt
have steadily increased.
Amalgamations, mergers, de-merger, joint ventures, acquisitions
and sell-off (AMDJAS) activity in Steel sector
Introduction

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The average EBITDA margin of steel companies has dropped
by over 40 per cent. As a result, a large number of advances to
the iron and steel sector are under stress, which may soon lead
to non-performing assets

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 Signs of distress in the steel sector are increasing as we see several
steelmakers on the verge of bankruptcy and seeking to divest assets
to reduce debt
 The total exposure of Indian banks to the steel sector stood at
around ₹ 2,98,500 crore as on December 25, 2015
 Most companies are over-leveraged with half of this debt with
companies having a debt to EBIDTA ratio of greater than 12
 Between December 2014 and December 2015, ₹ 8,891 crore of
debt to the steel sector entered corporate debt restructuring (CDR)
 As of December 2015 the sector accounted for the highest amount
of loans under CDR at ₹ 54,051 crore
Debt Exposure of Steel Sector

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Ratio Analysis
Source:
https://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?in
d=107

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 A moratorium period on payments of interest and principal
amount
 Splitting of its total debt into sustainable debt and balance
debt
 Long-term debt, working capital and a pre-determined debt
service coverage ratio to form part of the sustainable debt
component while the remaining can be part of the balance
debt
 The balance debt is proposed to be repaid over an extended
period of time by converting it into redeemable preference
shares or redeemable bonds
What can be done by Financial Institutions

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What can be done by Financial Institutions
 Financial Institutions could take up stake in steel companies
 Financially engineered products may be created to take care
of Banking rules and protect the companies from becoming
insolvent
 Representation of Bank officials on Bank Board
1. Alternative Financing – Promote investment by wealthy
individuals and companies
2. Portfolio Rebalancing
3. Unlocking the cash flows
 Limitations of Insolvency code and Insolvency Professional

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 The study covers 65 large steel companies for announcement
of AMDJAS activity
 Period of Study : June 2007 to June 2009
 Stock Price Movement
 Quarterly Accounting Performance
AMDJAS Data and Methodology

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 Whether AMDJAS activity is present in Indian Steel sector or
not
 What is the effect on the closing prices of stocks when
AMDJAS announcement is made?
 How does AMDJAS activity affect accounting variables?
Objectives

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Findings and Analysis
Price Increased
Kalyani Steel, Adunik Metaliks (a,b), Bihar Tubes,
Tata Steel (a, b, c, d, e, f), Ramsarup Industries, Bhushan Steel,
Jindal Stainless, Tulsyan NEC, Uttam Galva
Price Decreased
Visa Steel, JSW Steel (a, b, c,d), PSL, Usha Martin, Jindal Saw,
Lesha Energy
No Effect – Zenith Birla

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Accounting Performance Increased
JSW Steel (c), Bihar Tubes, PSL, Tata Steel (b),
Bhushan Steel, Usha Martin, Tulsyan NEC, Jindal Saw,
Zenith Birla, Uttam Galva
Negative Accounting Result
JSW Steel (a,b), Tata Steel (a)

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Mixed Accounting Result
Sales Increased but Net Profit and EPS decreased
– Kalyani Steel, Visa Steel, Adunik Metaliks, JSW Steel
(d), Tata Steel (c, d, e), Jindal Stainless
Sales and EPS increased but Net Profit decreased
– Ramsarup Industries
Net Profit Increased but Sales decreased
– National General Industries

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Summary of Findings
Description Number Closing Price
Movements
Accounting
Variables
Movements
Joint Venture 15 9 increases/
5 decreases
6 increases/
6 mixed results/
2 decreases
Merger/
Amalgamation
6 2 increases/
2 decreases/
1 no change
4 mixed results/
2 increases
De-merger 3 1 increase/
1 decrease/
1 no change
2 increases
Sell-off 2 2 increases 1 decrease
Acquisition 1 1 decrease 1 increase
Total 27 14 increases/
9 decreases/
2 no change
11 increases/
10 mixed results/
3 decreases

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Amalgamations, mergers, de-merger, joint ventures,
acquisitions and sell-off have led to development of Dinosaurs
which are becoming more vulnerable to systematic and
unsystematic risk factors
Systematic Risk
1. Interest Rate Risk
2. Purchasing Power Risk
3. Political Risk
Unsystematic Risk
1. Financial Risk
2. Management Issues
Risks to be managed

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Thank You
for
your Patience
If you have any unanswered Questions . You can reach us at
sa@iif.edu OR sa@financeindia.org

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