Insolvency proceedings for stressed a/cs may lead to consolidation in the steel sector
Insolvency proceedings for stressed accounts may lead to consolidation in the steel sector. This could prompt stronger steel players with healthy financial profile to bid for these assets at attractive valuations and increase their market share, according to ratings agency, ICRA.
“We feel that the insolvency proceedings for stressed accounts may lead to consolidation in the steel sector, whereby stronger steel players with healthy financial profile would have a chance to increase their market share by bidding for these assets at attractive valuations,” Jayanta Roy, Senior Vice President, Corporate Sector Ratings, ICRA Limited said.
“In such a scenario, the steel sector, faced with a weak demand and an overcapacity situation would benefit in the long run,” he added.
Total exposure of the Indian iron and steel sector in the banking system stood at Rs. 3.13 lakh crore as on March 31, 2016. Weak demand, surge in cheaper imports in FY15-16, led to a significant rise in stressed accounts in domestic steel sector with gross non-performing assets (NPAs) of about Rs. 1.15 lakh crore as on March 31, 2016, roughly about 37% of its total exposure to the banking sector.
As per the Banking Regulation (Amendment) Ordinance, 2017, the RBI is empowered to issue directions to any banking company to initiate the insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC).
Five out of the dozen odd accounts, which are referred under the IBC, are from the iron and steel sector with a total debt of about Rs. 1.4 lakh crore as on March 31, 2016. These companies together contribute about 16% to India’s installed steel production capacity. While a prompter resolution of these stressed assets is the need of the hour, its impact on domestic steel industry depends on the actual implementation of IBC proceedings, the ICRA note added.
Profitability and coverage indicators of these accounts hit a low in FY2016 as a result of commodity price meltdown and onslaught of cheaper imports. While the operating profitability of most these accounts improved in FY2017 on the back of improved prices, net profitability remained in the negative territory due to significant interest burden. Interest coverage ratio for most of these accounts remained below 1.0 time and the total debt to operating profit ratio remained stretched at about 26.0 time even in FY2017, when financial performance of steel players improved on the back of favourable government policies.
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