Race to the Top

Over the past eight years as the Indian steel industry went through volatile times, the battle between the Sajjan Jindal-owned JSW Steel and Tata Steel to emerge as the country's largest steelmaker has gathered steam. JSW is the largest domestic steelmaker now and has been ramping up capacity aggressively.

Eight years ago, in FY2010 both Tata Steel and JSW were neck to neck in domestic capacity. Tata Steel produced 6.44 million tonne (MT) steel within the country and JSW was marginally behind at 6 MT. Jindal saw an opportunity in the downturn and raced ahead of Tata in capacity creation, putting up additional capacities at its Vijayanagar plant in Karnataka, and acquiring the 3.3 MT facility of Ispat Industries in Maharashtra. In FY2017, Jindal's output shot up to 15.8 MT, while Tata's rose to 10.97 MT on the back of the additional 3 MT plant at Kalinganagar in Odisha and 3 MT in Jamshedpur. Those numbers will rise again as JSW recorded 11.96 MT and Tata Steel 9.41 MT in the first nine months of FY2018.

That was the period when Tata Steel was struggling to digest its largest acquisition, the $12-billion acquisition of Corus. Today, Tata Steel is the third largest, behind state-owned Steel Authority of India (SAIL), as far as domestic capacity is concerned. However, it is the biggest Indian steelmaker if both domestic and global capacity is considered.

Now, as the steel cycle is on an uptrend, there are big opportunities. At least five steel companies - Essar Steel (10 MT), Bhushan Steel (5.6 MT), Bhushan Power and Steel (2.3 MT), Monnet Ispat (1.5 MT) and Electrosteel Steels (2.5 MT) - are up for sale under the new bankruptcy law.

As the steel business environment in India is changing, and demand rising, it is going to be a phase of aggression for both Tata Steel and JSW. Both have submitted bids for these distressed assets. Tata Steel's acquisition of Bhushan Steel is all but complete. It has also outbid JSW in the race for Bhushan Power & Steel. In addition, the world's largest steelmaker ArcelorMittal is pitching hard to buy out the assets of Essar Steel to make an entry in the Indian steel industry.

Consolidation War

According to the World Steel Association's 2016 numbers, Tata Steel is the 10th largest steel producer globally, while JSW is ranked at 21 and SAIL at 23. Including its European business, Tata produced 24.49 MT of steel, while JSW produced 14.91 MT. ArcelorMittal, controlled by global steel baron L.N. Mittal, could exceed global output of 100 MT, from the 95 MT in 2016, if it manages to acquire Essar Steel. Besides, the steelmaker sees a lot of scope in expanding the capacity at the Hazira plant of Essar to 18 MT from 10 MT. ArcelorMittal's India journey has been fraught with obstacles as it had been trying to set up greenfield plants in Jharkhand, Odisha and Karnataka. Land acquisition was the biggest task before them.

In the battle for Essar Steel, the resolution professional had declared the bids of ArcelorMittal and Numetal Mauritius ineligible. ArcelorMittal's stake in Uttam Galva, another bankrupt company, was cited as the reason for disqualification. While Numetal, backed by a consortium led by Russia's VTB Bank, had the estranged promoter of Essar Steel, Rewant Ruia, as the stake holder. Section 29(A) of the Insolvency and Bankruptcy code (IBC) bars defaulting promoters from participating in the corporate insolvency resolution process.

ArcelorMittal and Numetal filed an application at the National Company Law Tribunal (NCLT) Ahmedabad challenging the decision of the resolution professional. Senior counsel Darius Khambatta, who represents the committee of creditors (CoC), said both ArcelorMittal and Numetal can participate in the re-bidding after taking corrective measures that had led to their earlier disqualification. So, apart from ArcelorMittal and Numetal, the other companies that can participate in the re-bid are Vedanta, Tata Steel, Nippon Steel and Sumitomo Metal Corp., and SAIL.

Tata Steel's acquisition of Bhushan Steel is awaiting regulatory approval from the NCLT and the Competition Commission of India (CCI). Tata Steel emerged as the highest bidder with a Rs35,000-crore offer, paving the way for the acquisition of 5.6-MT plant in Odisha with a product basket catering to high-value auto and consumer durable makers.

The new Tata chairman N. Chandrasekaran, who took charge a year back, sees acquisitions as the route to regain its lost edge in the domestic market. It also plans to start expanding the Kalinganagar plant by April - the steel company has pledged Rs23,500 crore investment to ramp up crude steel capacity to 8 MT from 3 MT. The Tata Steel board approved a rights issue of Rs12,800 crore, partly to fund the expansion. The full ramp-up will enrich the product mix of the Kalinganagar plant and will fetch better margins, experts say.

"Acquiring Bhushan was a well-thought-out strategy by the Tatas as the mines and plant, which is relatively new and operational, are of global standards," says an analyst.

But Bhushan Steel and Power is likely to see a second round of bidding since London-based Liberty House challenged the decision of the resolution professional, who didn't accept its bid citing delay at the NCLT. Tata Steel also participated in the bid for Electrosteel Steels, but industrialist Anil Agarwal's Vedanta Resources emerged as the lead bidder. If Vedanta wins, Electrosteel will be its first steel business.

An ICRA executive had earlier said that the capacity of Tata Steel India will almost double in the next five years, if it wins Bhushan companies and adds a 5-MT capacity in Kalinganagar.

Tata Steel Europe is on the verge of forming a joint venture with Thyssenkrupp of Germany and shifting the focus of the Tata group back to India. Thyssenkrupp and Tata reached a preliminary agreement to merge their European businesses in September 2017 to create the continent's second-largest steelmaker after ArcelorMittal, with 15 billion euro (about Rs1.14 trillion) of sales.

Both companies will own 50 per cent each in the venture and have committed to hold equal shares in the entity for the first six years, Thyssenkrupp personnel chief Oliver Burkhard had earlier told reporters. In case of a listing, Thyssenkrupp and Tata Steel's joint ownership in the venture will not fall below 50.1 per cent. The deal is expected to be concluded in a few months.

What's in Store?

While acquisitions and capacity addition go on in tandem, JSW targets to become a 40-MT entity in India by 2025. The Jindal firm formed a consortium with AION capital and submitted a Rs3,700-crore resolution plan for Monnet Ispat, which was founded by Jindal's brother-in-law Sandeep Jajodia. Since they are the only bidder, the deal will be concluded soon. JSW is also set to acquire Italy's second-largest steelmaker Aferpi (2.5 MT) for Rs600 crore.

Jindal recently said that JSW Steel wanted to re-enter the bid for Essar Steel in the second round in April. But creditors decided against it as they didn't submit the expression of interest (EoI) before the first round. At that point time, Jindal's interest was in Bhushan Steel, but the company lost to Tata in the bid. Jindal is investing Rs26,800 crore over the next three years for building new capacity. It includes doubling of its Dolvi plant in Maharashtra to 10 MT with an investment of Rs15,000 crore.

JSW Steel's debt of Rs43,700 crore was a major worry for the investors earlier. But in the changing steel scenario, the debt seems to be manageable. In comparison, Tata Steel has a consolidated debt of Rs83,000 crore. JSW is valued at Rs69,200 crore on the stock market, while Tata Steel is valued Rs63,800 crore as on March 28.

Analysts with Motilal Oswal estimate that the sales of JSW Steel will increase to Rs68,641 crore in FY 2018, compared to Rs55,605 crore in FY 2017. The EBITDAis expected to rise to Rs13,543 crore from Rs12,260 crore. For Tata Steel, consolidated sales are expected to go up to Rs1,28,620 crore from Rs1,12,299 crore, while EBITDA is expected to rise to Rs21,515 crore from Rs17,008 crore.

As the steel market heats up, both private players are looking to consolidate their position for the longer battle ahead. Things could, however, change if cheap steel starts flowing in with the US hiking import duties on steel.

@nevinjl