Bankruptcy proceedings against big Steel firms to help consolidation, woo MNCs

Bankruptcy proceedings against many large steel companies may lead to consolidation in the sector and the entry of global players in the alloy segment, says a report. "The domestic steel sector may see further consolidation in the wake of the many insolvency proceedings launched against stressed accounts. A few large players with strong financial positions and debt-raising abilities have an opportunity to increase their market shares by acquiring stressed capacities at attractive valuations," says an EY India report. Global majors may also use this opportunity to enter the domestic market given its long-term attractiveness, the report said.

Bhushan Steel, Essar Steel, Monnet Ispat & Energy, and Electrosteel Steels are among the 40 largest defaulters referred by RBI for resolution under the new bankruptcy law and contribute half of the steel sector?s bad loans. EY points out that strong policy support in the form of the national steel policy, coal deregulation and focus on infrastructure development is expected to help the country to build a globally competitive metals and mining industry. The steel policy 2017, entailing an investment of Rs 10 trillion by FY31, seeks to boost domestic demand by increasing per capita steel intake to 160 kg from 60 kg now.

Further, commercial mining of coal, a sector which has been state-monopolised for over four decades now, should also lead to a transparent and competitive market-based coal pricing mechanism. The policy measures will not only encourage domestic investments but also attract foreign capital, which is home to one of the largest reserves in the world, the report said. The metals and mining sector saw an increase in M&A volumes in 2017 at 31 as against 24 in 2016, the aggregate disclosed deal value at USD 738 million was down by 64 per cent against last year. This was largely due to the absence of major share repurchase programs, which alone accounted for 91 per cent of the deal value in 2016.

"In 2018, we expect the M&A activity to stay healthy on the back of a stable economy, and continued efforts by the government to remove regulatory hurdles and attract foreign investment," EY India managing partner Amit Khandelwal said. EY expects steady M&A activity in the sector as players continue to explore inorganic avenues to expand portfolios, optimise cost bases and strengthen balance sheets in order to build competitive business structures in an otherwise cyclical industry.