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Ispat bets big on expansion, but analysts say funds won’t come easy

Ispat bets big on expansion, but analysts say funds won’t come easy
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First Published: Thu, May 01 2008. 11 15 PM IST
Updated: Thu, May 01 2008. 11 15 PM IST
Mumbai: Steel maker Ispat Industries Ltd has started funding discussions for its aggressive expansion plans, but some bankers and analysts tracking the firm say the company will find it tough to raise capital under prevailing business and economic conditions.
Ispat, in which Pramod Mittal and his younger brother Vinod Mittal, along with other promoters, own a 45.95% stake, is banking on the expansion plans to pull the company to profitability. Ispat, which will need substantial funds, already has huge debt.
It plans to raise a bulk of the funding from overseas, but that may be tough as theReserve Bank of India (RBI) has tightened external borrowing norms.
In addition, Global Steel Holdings Ltd, which owns 2.63% in Ispat and is promoted by the elder of the two brothers, has run into some issues over operations in Bulgaria and Nigeria.
“It is going to be very difficult for Ispat Industries to raise money and carry out its expansion plans, as they already have a huge debt and they do not have anything to take creditors into confidence,” said Giriraj Daga, who tracks the steel industry for domestic brokerage Khandwala Securities Ltd. “I do not see profitability returning, rather I expect the company’s loss to get wider.” Mint spoke to two bankers and four analysts, most of whom had similar views but didn’t want to be identified.
In the quarter ended December, Ispat posted a loss of Rs36 crore. For the nine months to December, its net loss is Rs14.09 crore, comparing favourably to a net loss of Rs91.65 crore in the year-before period.
The company is yet to announce its results for the year ended March. Ispat has reported losses for the past two years. In fiscal 2007, Ispat had a loss of Rs9.53 crore and reported a loss of Rs812.67 crore in the previous year.
The Ispat stock closed at Rs35.35 on the Bombay Stock Exchange (BSE) on Wednesday, down nearly 60% from its 52-week high of Rs87.40 in mid-December. In this period, the BSE’s metal index was down 13%. Ispat is one of the constituents of the BSE metal index.
Ispat’s vice-president of communications strategy, Suman Das Sarma, says the company isn’t facing any trouble raising funds.
“International investors have already shown interest in our company and we do not see any problem in raising the requisite fund to complete our project,” Sarma said in an e-mail reply to a questionnaire. “Currently, Ispat has a debt of about Rs6,500 crore on a share capital of about Rs2,288 crore, including Rs1,218 crore of equity and about Rs1,070 crore preference capital.” Its total debt at the end of March 2007 was about Rs8,300 crore.
Ispat, which does not have any captive sources for iron ore or coal, is implementinga capital expenditure plan of about Rs2,300 crore toadd backward integration facilities and increase capacity at its Dolvi steel complex inMaharashtra.
The expansion includes a 1 million tonne (mt) capacity coke oven plant at about Rs900 crore, which will be developed in a joint venture with Stemcor Holdings Ltd, a UK-based steel trading firm. Ispat will hold 26% in the venture.
The plan includes a 2mt capacity pellet plant at about Rs400 crore, and a 1.2mt blast furnace. Ispat also wants to expand its hot-rolled coil capacity to 3.6mt, from 3mt, at a cost of Rs1,000 crore.
“At the next stage we intend to take Dolvi steel complex capacity to 5mt by 2012, by adding balancing finishing line facilities to match our iron making and steel-makingfacilities,” Sarma wrote.
To finance the expansions, Sarma wrote, Ispat has a funding pattern spread over 18-24 months, including preferential equity warrants issued topromoters totalling about Rs506 crore, in addition to about Rs1,000 crore from“international accruals” and structured convertible bonds that will be offered in international markets.
Internationally, the Pramod Mittal-promoted Global Steel Holdings, however, is struggling with its other issues. In Nigeria, the new government has revoked two contracts, and in Bulgaria, its Kremikovtzi steel mill has been put on the block under pressure from bondholders.
Indian firms’ overseas borrowing route too is under close scrutiny from RBI, India’s banking regulator.
Over the past year, the Indian central bank has been progressively tightening its noose around external commercial borrowings (ECBs), including foreign currency convertible bonds (FCCBs).
Bankers say hundreds of applications are pending for approval with RBI for ECBs and FCCBs, and the central bank is unlikely to give approvals any time soon.
According to the Ispat official, the company is also looking for mining assets in India and abroad.
“In Maharashtra, we have been allotted prospecting lease for iron ore for which prospecting has already started. In other mineral-rich states inIndia, Ispat has applied for mining leases and some of these are under process by state and Central governments,” Sarma wrote.
The company has signed up an agreement with the Jharkhand state government to set up a steel plant with 3mt per annum initial capacity, which will be expanded to 5mt a year in a “very short period”.
Sarma denied that Kremikovtzi has been put on the block for want of money. “There are other important commercial and social issues for which Global (Steel) is looking for strategic partners that will help run Kremikovtzi smoothly and avoid a closure. Merrill Lynch is advising Global on this,” he wrote.
Global Steel acquired a private company, Finmetals Holdings, which has a majority stake in Kremikovtzi, in 2005 for an undisclosed amount. “Since Kremikovtzi was privatised in 1999, Global Steel is the first company to pay back government debt and clear liabilities to state-owned utilities to the tune of about €150 million (Rs946.5 crore), besides investing in commissioning second steel caster, revamping basic oxygen furnace, LD shop, blast furnace and other facilities. Work on sinter upgradation is in the process,” added Sarma.
The production of Global Steel is less than half its total capacity of about 10mt. “Since most of the plant acquired were either closed or underutilized recently, these capacities produce about 4mt,” said Sarma.
Once the operations in Bulgaria are sold, Global Steel will have a worldwidecapacity of about 6mt, excluding Ajaokuta Steel in Nigeria, which has an annual production of about 2.5mt.
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First Published: Thu, May 01 2008. 11 15 PM IST
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