Meltdown ahead: 9 mt of new capacity to come onstream this year, 95 mt existing capacity. 4.5 mt-- the capacity of SAIL's Rourkela plant was doubled on April 1.
A spate of approvals by willing bankers to approve generous debt restructuring packages to a handful of private sector steel makers before the deadline ended on March 31 has prevented these companies from defaulting on their debts.
But there are high chances of these accounts turning bad assets in the books of the banks as steel market continues to remain sluggish with little or no signs of recovery.
What's worse, steel prices continue to slide, and the year would see capacities being added at a ferocious pace, dampening any signs of the recovery in demand for steel that could have happened otherwise.
Prime Minister Narendra Modi dedicated to the nation doubling of hot metal capacity of SAIL's steel plant in Rourkela to 4.5 mt year on the first day of the new financial year.
More capacity would continue to get commissioned in coming days. The year will see nearly 9 mt of capacity getting added to the existing 95 mt, according to rating agency Crisil.
And this would happen even as prices continues to remain depressed.
"We are hoping for a recovery, may be in the next two years. There has been little sign of improvement in demand on the ground though there has been many positive signals given by the government. Steel prices continues to slide," Kamal Jain, chief financial officer of MSP Steel & Power, told dna.
MSP Steel is one of the many companies like Adhunik Metaliks and Concast Group and others who got their debts restructured through conversion of loan into equity, moratorium on interest payment and reduction on interest rates
Take MSP Steel. Out of its Rs 1,000 crore of debt burden, Rs 140 crore of short-term debt would get converted into long-term debt. There is now a six months' moratorium on interest payment on working capital loans and two years' moratorium on long-term debt. Additionally, interest rates of about 13% would get reduced to 10.75%-11%, said Jain.
For Adhunik Metaliks, a portion of the aggregate debt of Rs 5,000 crore of the group would get converted into equity in case of default, a company official said.
But these are just accounting treatments, a medicine which can't cure the disease, and would only postpone what is inevitable, said Deep Mukherjee, senior director, India Ratings & Research.
"Unless commodity market recovers these steel companies would again turn sick. Ideally these debts should have been written off. Corporates classified as known stress and vulnerable have their market capitalisation eroded 80%-99% over last two to four years. The median debt-to-market capitalisation for these corporates is currently around 8.0. Thus, theoretically even if existing shareholders are wiped out and equivalent debt is converted into equity, it would address only 10%-12% of the total debt," Mukherjee told dna.
The CDR packages would only be successful if there is recovery in the next 2-3 years, he said. "In the meantime, if we get a shock from the currency front, things will be back to square one," warned Mukherjee.
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