Rupee’s tug-of-war with Dollar causes roundabout turns in the financial sector of six giant Steel companies of India namely Tata Steel, SAIL, JSW Steel, Essar Steel, JSPL and Bhusan Steel.
The above stated behemoth steel companies of India are under a debt of INR 1,525.5 billion owing to loans taken from foreign banks and expensive imports of raw material. The financial crisis for these giants began long back in 2008 which are likely to continue with the passing time and with the rupee having a roller coaster ride against dollar in the international market.
Bhaskar N Basu, a research analyst at Bank of America-Merrill Lynch, on his report as on 17 July’13 projected Tata Steel’s net debt to be at INR 632 billion whose debt to equity is likely to grow up to 1.75X compared to growth of 1.6X in FY13. Mr. Basu cautioned in his report that Tata Steel’s cash flow will not be sufficient for any future capital expansions.
According to a media report, Tata Steel’s free cash flow was (-) INR 49.8 billion in FY13. A free cash flow is the exceeding amount left after the actual expenses of a company on assets or imports is deducted from its investment. The cash left is known as free cash flow and can be then used for some expansion projects or other necessary expenses.
Tata Steel’s around 62% and JSW Steel’s 40% of net debt are in foreign currency landing them into trouble with the weaker rupee against dollar.
|Data Analysis of Amount taken as Debt by the Steel Companies in past few fiscals|
|Company Name||Net Debt ( INR in billions)||Free Cash Flow (INR in billions)||Debt to Equity||Expansion (in MnT)|
|SAIL||176.5 (FY13)||-67.5 (FY12)||0.47 (FY13)||4 (FY14)|
|JSW Steel||196.9 (FY13)||-12.5 (FY13)||0.88 (FY13)||3 (FY12)|
|Tata Steel||562.1 (FY13)||-49.8 (FY13)||0.5 (FY13)||3 (FY13)|
|Essar Steel||220 (FY13)||+10.1 (FY10)*||2.51 (FY12)||5.4 (FY12)|
|JSPL||170 (FY14)||-32.4 (FY12)||1.42 (FY12)||1.6 (FY14)|
|Bhusan Steel||200 (FY14)||-45.8 (FY12)||2.85 (FY12)||2.5 (FY14)|
Note: *Company’s latest data not available.
Weaker rupee against dollar and low demand for steel in the domestic market, supported by high import cost of the material has resulted in poor profitability margin for these steel giants. The steel industry is facing a situation similar to what it had faced during 1998-2002. According to the analysts, the situation this time may linger around longer and the large steel manufacturers will largely suffer from the slowdown scenario.
“The steel industry is facing a challenge because no new projects (construction and infrastructure) are coming through and the macro environment has also not been very good. There are companies which are into CDR but this industry can turn around if there are some changes in regulations which can aid construction activity”,said K.R. Kamath, Chairman & MD, Punjab National Bank.
Steel industry growth could possibly gain pace by 2014 only if the economic growth of India is recovered and government gives a helping hand to the infrastructure sector of the country. However, Government has plans of investing around USD 1 trillion in the infrastructure sector of the country.
Steel behemoths could find their debts increasing its size, but will get a supportive shelter from cheap iron ore, better margins than overseas peers, and probability of exports. The companies will surely survive in the long run even if their interest service coverage ratio witnesses a steep fall.