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By Ramnath Subbu
Last year, however, saw five successive upward revisions in prices of hot rolled coil (HRC) with the market absorbing these hikes. According to the Credit Rating and Information Services of India (Crisil), HRC gross realisations have been steadily on the uptrend. From Rs. 15,000 a tonne level in January-April 2002, it perked up to Rs. 17,000 in May and since June has been above Rs. 18,000 level. Steel deregulation in 1991 resulted in a capacity build-up and the support from financial institutions enabled private players to enter the arena. However, this brought with it attendant debt problems when the industry slumped. World Steel Dynamics, in its report on India said, "The huge debt of most of the companies is a double-edged sword. The debt is a major problem because it is not being repaid. However, without it, some of the industry's newest and best steel plants would not be in existence". The assumptions made by the institutions at the time of approval of project financing, however, have gone awry and affected companies feel that the appraising institutions erred in their projections as they were overoptimistic without factoring in the downturn or downcycle in the industry. According to `Minerals & Metals Review-December 2002', at that stage, 19 new projects with a capacity of 13 million tonnes at an investment of Rs. 32,000 crores were planned. Of the 19 projects, nine have been commissioned with an annual capacity of 5.75 million tonnes. Of the nine, one has shut down, three have a capacity of 2.2 million tpa and have been partly commissioned of which two have been closed and one is in production. Crisil's analysis shows Indian steel companies' operating margins being more or less comparable to those of a sample of international companies with the key difference being the latter having much lower interest costs. Interest as a percentage of profit before depreciation, interest and tax (PBDIT) was 432 per cent for Indian companies in the year ended March 2002 while it was only 30 per cent for international companies in the financial year ended December 2001. The Steel Authority of India, Jindal Vijayanagar Steel, Jindal Iron and Steel, Essar Steel and Ispat Industries have been considered in the Crisil study and taken together, they have up to Rs. 30,000 crore of debt on their books. The last two years represent the two extremes of the steel price cycle with 2000-01 being one of the best years for the industry in terms of prices and 2001-02 being among the worst. Better capital structure of international companies and to a lesser extent, lower interest rates are responsible for this. Speaking to The Hindu, Arun Panicker, director, Corporate Ratings, Crisil, said, "There has been a turnaround and steel prices are moving up. This would benefit both stronger and weaker players. However, even assuming the strong prices, the debt on board for most of these companies is high. The only way it could be corrected is if some adjustment is made, either if it is written off or converted into equity". It is not possible to reduce these debt levels with companies' cash flows from operations. While some have attempted to reduce the debt by selling non-core assets and operations, these measures have been inadequate to reduce debt to sustainable levels. Thus, debt restructuring that could include large write-offs or conversion of debt to equity seems essential. Essar Steel, for example, has a total debt of around Rs. 5,400 crores. Of this, rupee loans constitute around Rs. 3,300 crores and foreign currency and unsecured loans amount to the remaining Rs. 2,100 crores. Ispat Industries is awaiting clearance of its restructuring programme by lenders. The programme entails lowering of interest rates and conversion of part of the debt into equity. It includes a loan sanction of Rs. 518 crores and a term loan of Rs. 1,465 crores to fund interest. Some solution to the industry's problems could be close at hand with banks and institutions scheduled to meet later this week to clear restructuring programme for three of the companies — Essar, JVSL and Ispat Industries. The package is expected to reduce the interest rate on term loans to 14 per cent from 17-18 per cent as also conversion of 40 per cent of the loans into foreign currency loans carrying an 8 per cent interest rate. Also on the cards is conversion of the overdue loans into zero coupon bonds, which would be redeemed in tranches. Steel companies, on their part, would need to pledge a part of their equity. The benefit of conversion into foreign currency loans would be available to those exporting a part of their output. The entire restructuring package is to be implemented by the end of the current financial year. In sum, Mr. Panicker of Crisil said, "No doubt the situation today is far better than a year ago. These companies would certainly make lower losses in this (third) quarter, but it is unlikely that they would be able to wipe out their losses soon".
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