Last week, the Vedanta group’s iron ore business was in the news. Firstly, its parent London-listed Vedanta Resources Ltd told investors to expect an impairment charge for its Indian iron ore operations. Secondly, Vedanta Ltd’s (Vedanta) bid for the resolution of Electrosteel Steels Ltd was declared successful.

The bad news on impairment was expected. Goa iron ore mining operations of Vedanta, and other miners, had to shut from 16 March, following a Supreme Court order. It has to obtain fresh clearances before restarting operations. The amount of impairment because of the ban could be $700-800 million at the gross level or $600-700 million net of taxes, according to a Vedanta Resources statement.

Although Vedanta itself is yet to make an announcement, it is reasonable to expect impairment in its books as well. It’s a non-cash charge and is reversible. Iron contributed only 2.8% to Vedanta’s segment profit in the December quarter and its Karnataka iron ore operations are functioning. The impact on profits will be marginal.

If the Goa mining ban is a worry, the bid for Electrosteel Steels is an attempt to secure future growth. In its January conference call, Vedanta had said that its iron ore mining licence in Jharkhand requires it to do value addition within the state. The policy seeks to encourage setting up of domestic industry rather than mine ore and transport it to another state for value addition. That’s its main interest in acquiring Electrosteel.

Vedanta’s presentation talks about a 10 million tonnes per annum iron ore project in Jharkhand. In fact, it is in the process of setting up a 1 million tonnes plant to make pig iron and ductile pipes in Jharkhand, which is in the preliminary stage.

Electrosteel was setting up a 2.5 million tonnes integrated steel plant to make pig iron, billets, bars, wire rods, and ductile iron pipes. The project got delayed but is partially operational. More importantly, Electrosteel has iron ore linkages to supply raw material to the project, so Vedanta could get access to these mining reserves as well.

In the quarter ended December 2017, Electrosteel earned revenue of Rs857 crore but incurred a loss of Rs327 crore, with interest costs alone at Rs285 crore. It had a negative net worth of Rs568 crore, which will worsen in the current fiscal, as nine-month losses were Rs867 crore. The company’s insolvency process puts financial creditors’ claims at Rs13,395 crore and operational creditors at Rs782 crore.

Newspaper reports have indicated Vedanta having offered Rs5,000 crore to banks but these bids need to be seen overall for what they offer, in terms of equity stake, funding concessions and so on. Once Vedanta gets control, it will have to invest money to complete the project. Vedanta’s consolidated net debt to equity of 17% gives it the flexibility to fund this bid without stretching itself.

More clarity on the bid amount, structure and additional funding should become clear in the coming months, as also whether Vedanta proposes to merge Electrosteel or keep it separate. While the acquisition itself increases the steel component of Vedanta’s metals business, its attraction is in using this to add to its iron ore mining reserves. At present, domestic steel capacity is ample to meet domestic demand, with companies having to export surplus steel. If domestic demand exceeds supply on a sustainable basis, Vedanta may then consider a ramp-up of its ambitions in the steel business to a much bigger level.