The Ruias-led Essar Steel is looking for a foreign company, most likely Japanese, as a strategic investor, to reduce its mounting debt and fund capital expenditure plans, sources said.
Essar has appointed ICICI Securities and SBI Caps as advisors for the possible stake sale, which is expected to reduce its debt of about Rs 30,000 crore. The company could also rope in to include large traders who typically have a robust cash flow, soruces added.
The move is also to likely to help the company tide over factors affecting full utilisation of Essar’s capacities due to price and supply constraints in natural gas, a major component of steel-making. The company has 20 million tonnes of pellet-making capacity — an intermediate raw material needed for producing steel— and over 10 million tonnes of steel capacity.
While a company spokesperson did not offer comments beyond the appointment of the advisors, people connected with the issue said: “Restrictions on gas supplies have forced us to operate at about 60-65% capacity. This comes at a time when the overall steel market is down due to the global lull and dumping by the Chinese and other steel mills has affected the ability to service payments.”
“Major steel companies across the world are taking steps to cut costs and raise funds. India is no different and it is important that measures are now taken to maintain the long-term health of the steel industry. It is in this context that Essar Steel has taken a proactive decision to induct strategic/financial investors into the company,” the company said in a statement.
Indian steelmakers’ preference for Japanese firms is not new. In 2012, Sajjan Jindal-led JSW roped in Japan’s JFE as equity partners,while a year earlier, the Tatas formed a joint venture (JV) with Japan’s Nippon Steel.
Japanese steel companies have also been eyeing the Indian steel industry because of the availability of raw materials such as iron ore, and rising demand from domestic companies, especially those in defence and aerospace.
“Among foreign players, Japan has had a relatively better track record of managing the Indian industry,” said a member of a promoter family which owns a large steel-making facility in Mumbai. “While Korea had evinced interest earlier, the experience of Posco, which could not progress in building a greenfield plant in India, may have discouraged them. Already, most of the steel made by Japan and Korea is affecting local steelmakers in India.”
Essar Steel could also look at bringing in a trader. Globally, firms such as UK-based Stemcor, the Klesch Group, US-based Nucor, have picked up equity stakes in different companies. Klesch recently walked out of talks to buy a Tata Steel UK unit, while Stemcor, which had a JV with Essar, is facing its own liquidity problems. “Nucor has fared comparatively better. These firms have a better grip on finances as they have a relatively leaner size and hedge their contracts,” an analyst with a foreign brokerage said.