Metal companies feed spike in demand, prices with fund infusion

Posted on: 26 Mar, 2018

Tata Steel is close to acquiring the mid-sized Bhushan Steel. More such cases nearing resolution have sent out positive signals to investors, said Sogani, pointing out that reports indicate the 40% capacity share of the unorganised steel sector is set to shrink further.


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Metal companies such as VedantaBSE -2.39 %, Tata SteelBSE -0.78 %, JSW Steel and Jindal Steel & Power (JSPL) have all been raising funds in the past month. 

While Vedanta on Friday said it will raise Rs 4,500 crore, a move aimed at regular refinancing, JSPL is raising Rs 1,200 crore by way of qualified institutional placement (QIP) to meet working capital needs and repay long term loans.

The duo joins Tata Steel, which raised Rs 12,800 crore last month through a rights issue to fund capacity expansion at Kalinganagar, barely days after JSW Steel said it would be issuing dollar-denominated senior notes.

JSPL had initially planned to raise Rs 900 crore with an option to raise up to Rs 1,200 crore, depending on demand. The issue received good response, according to the company, and was oversubscribed 2.2 times even at the higher end of the price band of Rs 233, said an official. The fund raising spree coincides with an upturn in the steel cycle as domestic demand picks up after a gap of almost five to six years. Steel prices too have perked up in tandem, with a 20% jump in last few months alone. With a spate of government projects in affordable housing, power and railways going onstream, India’s large integrated steel producers are gearing up to add capacity.

These plans form an integral part of the ambitious National Steel Policy (NSP), which aims at raising India’s production capacity to 300 million tonne per annum (mtpa) by 2030, up from 100 mtpa at present. The target involves a substantial hike in the country’s per capita consumption of steel to 160 kg from the present low of 65 kg per person, aiming for its highest growth in over a decade. 

While this may still be far below the average consumption in developed countries like the US or Japan, which top the steel consumption charts at 235 kg per capita, the NSP has set such an aggressive growth target, perhaps for the first time.

Deepak Sogani, chief financial officer, JSPL, said investors are showing a good appetite in Indian steel firms. “A growing home market, the government steel policy are factors adding to the optimism,” he said, having just returned from a roadshow for JSPL’s QIP. 

Insolvency resolution of stressed steel assets in the National Company Law Tribunal (NCLT) that will help consolidate the steel sector is being seen as an encouraging trend, as global ratings agency Moody’s said in a recent report. 

Tata Steel is close to acquiring the mid-sized Bhushan Steel. More such cases nearing resolution have sent out positive signals to investors, said Sogani, pointing out that reports indicate the 40% capacity share of the unorganised steel sector is set to shrink further. 

Most analysts agree that increasing consolidation, domestic demand and improving profitability add to the sector’s attraction. For companies such as JSPL, it may be to fund working capital as they try to improve their capacity utilisation, said Rohit Sadaka, metals analyst, India Ratings. “For others like Vedanta, Tata Steel and JSW Steel, it could also provide them with the cash they would need to pay upfront as part of their bidding for stressed assets.” 

The fact that India steelmakers have limited exposure to the US market — at around 2% — also lowers the risk of an adverse impact from the Trump administration’s recent decision to impose steep steel tariffs, Sogani added.

Also, a string of measures taken in the past couple of years, such as minimum import price, anti-dumping and safeguard duties protects India from cheaper imports.

Source: The Economic Times

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