Only one in three steel companies listed on BSE is generating sufficient cash flow to pay interest on loans on time.
According to Capitaline data, just 41 out of these 129 companies, which have collectively borrowed Rs.2.63 trillion, have an interest coverage ratio (ICR) above 1.5 times, considered a safe level while measuring a company’s ability to pay interest. The ratio is calculated by dividing a company’s earnings before interest and tax by its interest expenses.
The list does not include state-run steel manufacturing companies.
Only 24 companies—or about one in five—have an ICR above 2 times, meaning they have robust cash flows for interest payments.
For the entire Rs.2.63 trillion in loans, the aggregate ICR is a mere 0.79 times. An ICR below 1 indicates a company is not generating enough money to pay interest.
The International Monetary Fund (IMF), in its biannual Global Financial Stability Report in April, had warned that Indian banks have the least capacity, after Russian ones, among lenders in emerging markets to absorb losses—a fact that could destabilize the country’s banking system.
“For cyclical industries, the interest coverage ratio does go down during a down cycle, but that does not mean it will stay there. Capacity expansion and low capacity utilization can also mean low interest coverage ratio, but you can expect this to improve with demand in the next five to six years,” said Vibha Batra, senior vice-president and co-head of financial sector ratings at Icra Ratings.
A significant amount of the current debt was acquired to fund capacity expansion plans envisaged four to five years ago, when steel demand was expected to be robust. Globally, the steel industry is in a down cycle, which has forced steel manufacturing countries such as Japan, Korea and China to sell in India, placing further pressure on the margins of domestic companies.
“The debt protection metrics of steel makers are unlikely to witness any meaningful improvement in the short term due to their high debt levels and the fact that interest rates would still remain at elevated levels in absolute terms, notwithstanding an expected moderation in the next calendar year,” Icra said in a steel report in January 2015.
The country’s two largest private steel producers—Tata Steel Ltd and JSW Steel Ltd—alone account for over Rs.1 trillion of the total debt. JSW Steel, as on 31 March, had a total debt of Rs.34,884 crore and an ICR of 1.48 times.
“For JSW Steel, debt servicing is not a problem. We have met our interest obligations and will continue to do so,” said Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel. “At an industry level, I see the situation deteriorating as banks are turning cautious.”
Tata Steel’s debt as on 31 March was Rs.69,303 crore, with an ICR of 2.04 times. Tata Steel refused to comment since its quarterly earnings will be out this month.
Bankers are worried.
A public sector investment bank executive said, “Most steel companies are now looking at the 5/25 refinance route.” Under the 5/25 refinance route, banks can extend the repayment schedule of loans to 25 years with an option to refinance them at the end of five years.
Banks, however, are concerned about this trend. “Even if we were to give them 5/25 refinancing, how will they service interest in the initial period when their business has not picked up at all? Eventually, the stress will come back to hurt us after the moratorium on principal repayment is over,” said an executive director of a large state-owned bank, on condition of anonymity.
A second banker with a public sector bank pointed out that some of the smaller steel companies are still in the corporate debt restructuring (CDR) process and “some have even failed”.
On 27 July, lenders to Electrosteel Steels Ltd decided to take control of the company under the strategic debt restructuring rules introduced in June. Electrosteel was accepted for CDR in December 2013 to rework debt of over Rs.6,100 crore. However, the company exited the process after failing to implement the CDR package this year.
Is there a way out?
“The only way forward is for bankers and borrowers to sit down and figure out ways to reduce the debt burden and bring it to sustainable levels. Once the interest outgo comes down, financials of a lot of companies will stabilize. The next step will be to find ways to improve business,” said the second public sector banker.
Vishal Agarwal, managing director, Visa Steel Ltd, believes it is for the government to act now by increasing the import duty on steel and announcing a special dispensation for the steel sector. “The stress is due to external factors and reasons beyond the control of promoters and banks,” he said. Visa Steel entered the CDR process two years ago.
Given their inability to raise prices, there is not much steel companies can do in the current price-sensitive market to improve financials other than looking to increase operational efficiency, said Jayanta Roy, senior vice-president, Icra Ratings. “For banks, the decision is likely to be on a case-to-case basis, depending on how good the assets with these steel companies are,” he added.
Source: Mint