As costs pinch, sponge iron firms sell out

Jun2, 2011. 11:44 PM IST

Surging iron ore, coal prices force debt-laden small and medium-sized sponge iron makers to look for an exit

By Manish Basu, Livemint

Kolkata: It’s been nine months since SRMB Srijan Ltd—a Kolkata-based maker of construction reinforcement, or TMT bars—took control of Bhaskar Steel and Ferro Alloy Ltd for around Rs 350 crore.

Already, SRMB’s management is regretting its decision to take over the loss-making Rourkela-based sponge iron manufacturer.

The acquisition resulted in Crisil Ltd downgrading SRMB’s ratings on bank facilities in March, saying its “financial risk profile” was expected to deteriorate in the medium term.

“We did not realize (at the time of buying Bhaskar Steel) how bad the raw material situation is in Orissa,” the Kolkata-based firm’s director Ashish Beriwala now says.

Iron ore prices have surged thanks to the efficacy of a campaign against illegal mining in Orissa, forcing small and medium-sized sponge iron makers laden with debt to look desperately for an exit.

In the past three months, SRMB has turned down 10 proposals to take over ailing sponge iron and TMT bar makers. The turnovers of these companies range from Rs 200 crore to Rs 2,000 crore, and they are spread across Orissa, West Bengal, Jharkhand and Karnataka, according to Beriwala.

SRMB is instead diversifying into marketing other products such as cement and paints, leveraging its standing in the construction industry, he said.

According to industry estimates, the price of iron ore has doubled in the past year to Rs 6,000 a tonne.

Companies that buy from large miners such as NMDC Ltd under long-term contracts pay significantly less, but small sponge iron makers don’t have the muscle to conclude such deals.

That combined with the recent increase in coal prices, and the problem of irregular supplies from state-owned miner Coal India Ltd has pushed a large section of sponge iron makers and TMT bar makers to the brink of defaulting to lenders.

The clampdown on illegal mining has resulted in production in Orissa plummeting to around 40 million tonnes (mt) in fiscal 2011 from a peak of 74 mt in 2008-09, according to Subhendu Bhattacharya, secretary of the West Bengal Sponge Iron Manufacturers’ Association.

Bhattacharya, who owns a number of firms, is looking to sell Govinda Impex Ltd, which manufactures 100 tonnes of sponge iron a day at two factories in West Bengal.

The valuation offered to him by potential buyers is “pretty low—only marginally higher than my investment of Rs 30 crore on the firm’s fixed assets”; yet, Bhattacharya says, he is going to sell because one of the likely buyers has agreed to take over its loans of Rs 50 crore.

Though sponge iron makers have raised prices by 10-15% over the past few months to Rs 22,500 a tonne, their price realization is at least Rs 1,000 a tonne lower than their cost, according to Bhattacharya. The recent increase in coal prices was a killer blow—it raised fuel costs by around 30%.

“Sponge iron makers are in a terrible state,” said Bhattacharya. “Our debts are forcing us to sell our companies cheap.”

TMT bar makers are also facing a similar crisis.

The promoters of SMC Power Generation Ltd, one such firm based in Orissa’s Jharsuguda district, are on the lookout for buyers who will agree to take over bank loans of Rs 120 crore.

Despite posting Rs 420 crore in revenue in fiscal 2011, SMC Power needs to sell a controlling stake to be able to repay debt, according to its director Anurag Aggarwal.

Still, the bottom falling out of the market for some is a buying opportunity for others. Some companies such as Shyam Steel Industries Ltd, another Kolkata-based TMT bar maker, are on a buying spree—it has snapped up at least three firms in the recent past.

One of its recent acquisitions was Sova Ispat Ltd, a ferroalloys firm based in Bengal’s Bankura district. Its erstwhile promoter Ashok Mukherjee said he wasn’t even able to recover his investment of around Rs 150 crore from the sale.

“The transactions you are seeing now are distress sales,” said Barindra Bharadwaj, an independent chartered accountant, who acted as an adviser in the recently concluded acquisition of Ma Chhinnamastika Steel and Power Ltd by Gagan Ferrotech Ltd, both TMT bar makers.

Such a shakeout was last witnessed in the mid-1990s, when the West Bengal government took strict measures to curb power thefts, Bharadwaj added.

Some companies, though, continue to be bullish on future prospects.

“Valuations are attractive at the present moment,” said Sanjay Sureka, chairman and managing director of the Concast Group, which recently acquired SPS Steel and Power Ltd, a TMT bar and sponge iron manufacturer, for an aggregate valuation of around Rs 800 crore, of which Rs 105 crore was paid in cash to buy 50% equity stake in the firm.

“We expect returns in the long run to compensate for the difficulties being faced now,” Sureka added.

Bankers are watchful, and some such as Kolkata-based Allahabad Bank have decided not to lend to new projects. “We have decided not to take any fresh exposure,” said Deepak Narang, general manager (credit), Allahabad Bank.

Though the sector was going through “tremendous stress” and a number of companies were on the block, none of Allahabad Bank’s loans to ferroalloys and TMT bar manufacturers had yet turned sticky, he added. (sourced Livemint)