Mumbai: In the late 1990s, JSW Steel Ltd was in much the same position that Ispat Industries Ltd finds itself in now— laden with debt and trying to placate lenders.
Sajjan Jindal’s seven-seater Cessna Citation would make frequent trips to Jindal Vijaynagar in Karnataka to ferry journalists, lenders and industry veterans to the company’s new 1.2 million tonne (mt) steel plant. While visitors— among them Tata Steel Ltd managing director J.J. Irani— came away impressed by the state-of-the-art plant, business suffered as demand for steel slumped. The company had to sell products at prices that were below the production cost.
But the lenders were convinced about the quality of the plant and were keen on giving Jindal a chance to put the company, then called Jindal Vijaynagar Steel Ltd (JVSL), back on track with a corporate debt restructuring (CDR) programme.
At the time, JVSL’s debt to banks and financial institutions amounted to about Rs5,000 crore, with its stock trading at about Rs14.
The CDR programme was drafted in 2000 with Jindal agreeing to recompense any losses incurred by the institutions in restructuring the company’s loans, said a former managing director of IDBI Bank Ltd. The institution led the exercise to recast steel industry debt worth about Rs22,000 crore at the time.
Three other firms—Essar Steel Ltd, Lloyd Steel Industries Ltd and Ispat Industries—were among the companies that went in for CDR programmes. While Ispat hasn’t emerged from the recast, JVSL was the first to turn around, taking advantage of the surge in steel prices as commodities boomed, fuelled by explosive global growth led by China during the decade.
Jindal converted some of the loans into equity and brought in S.K. Gupta, an industry veteran who had worked with many steel companies, as vice-chairman.
“He was the most committed of the lot (the steel companies that faced financial problems),” said the retired executive director of a financial institution who worked on the CDR packages for the steel companies.
Such was the credibility that Jindal established with the banks that two years later, when lenders were looking for a buyer for ailing automobile grade steel maker Southern Iron and Steel Company Ltd, or Siscol, they turned to Jindal. He bought the company at Rs1 and took over its debt. Siscol is a now a profit-making company, providing high-margin, value-added products to JSW Steel.
“In a way, he obliged the institutions on Siscol,” the executive director said.
Jindal realized that he needed a larger balance sheet to borrow money to build special grade steel for auto, electrical and construction sectors and squeeze out higher margins.
He merged his cold-rolled and galvanizing unit Jindal Iron and Steel Co. Ltd in Maharashtra with JVSL and rechristened the merged entity as JSW Steel Ltd. He spun off his investments into JSW Steel Holdings Ltd and raised his stake in the steel maker by subscribing to preference shares, giving confidence to investors. He also scripted an ambitious plan to expand annual capacity to 12 mt from 7.8 mt.
But debt was ballooning as the company expanded and diversified into cement, power and ports. Jindal needed fresh equity to roll out his expansion plans.
He sold a 14.9% stake in JSW Steel to Japanese steel maker JFE Holdings Inc. in July and repaid nearly Rs2,500 crore to lenders to make his balance sheet healthy. He now wants to build a steel plant in West Bengal and buy iron ore and coal mines overseas to feed his steel and power plants across India.
In November, lenders invited him to save rival Ispat, owned by brothers Pramod and Vinod Mittal. The duo had held preliminary discussions with elder brother Lakshmi Mittal, chairman of the world’s largest steel maker ArcelorMittal, but couldn’t make much progress.
Under the terms of the deal, JSW will soon repay around Rs560 crore of Ispat’s debt that lenders had been pushing for. Longer term, Jindal has committed to bring in fresh equity and repay around Rs7,000 crore of Ispat’s total outstanding debt.
Jindal, 50, honed his skills under his industrialist father O.P. Jindal who died in a helicopter crash in 2005. From a small cold-rolling mill in 1982, Sajjan Jindal has built a $5 billion group with interests in power, cement and ports. Turning around Ispat will be his biggest challenge.
A mechanical engineer by training, Jindal has the deep pockets required to set things right at Ispat. But the real challenge will be to make steel at the lowest possible cost, improve margins and service Rs1,200 crore interest a year, said an Ispat employee who didn’t want to be named.