Why Indian Steelmakers Need To Be Cautious About Expansion

India’s steelmakers should be cautious while setting up new plants or buying stressed assets as the global capex recovery for metals is slow, and there are perpetual downside risks in the industry.

That’s the warning coming from Rakesh Arora, managing partner at Go India Advisors and a long-time watcher of the mining and metals sector. He is bullish on cash-rich Coal India Ltd., NMDC Ltd. and Hindustan Zinc Ltd. “[But] one has to be cautious with companies having high debt and looking to expand, as it doesn’t board too well in case things turn down.”

That’s why Arora maintains a ‘Neutral’ stance on Tata Steel Ltd. even after the steelmaker announced plans to raise $2 billion to buy stressed assets and repay part of its debt. Among the stressed steelmakers going into insolvency, the market is only interested in mapping the road ahead for Bhushan Steel Ltd. and Essar Steel Ltd., Arora told BloombergQuint.

The bidding for assets of these two companies with a good portfolio serves as a perfect opportunity for global steel majors like ArcelorMittal SA to enter the Indian market, he said Arora. The Luxembourg-based steelmaker should be aggressive in its approach, considering that domestic peers like JSW Steel Ltd. and Tata Steel can be potential bidders too, in that order, he said.

BloombergQuint reported on Wednesday that the Ruia family may have found a way to bid for Essar Steel’s assets despite the clause asking promoters to clear pending dues before bidding for stressed assets. The Ruias are “favorably placed” and should get to bid for their assets if it’s allowed, Arora said. “Nobody knows the projects better than their existing promoters.”

Overall, the first six months of 2018 look promising for commodities while the second half is clouded with doubts. It will largely depend on China’s stand on metals as it continues to cut down obsolete and polluting capacities, which will impact India’s imports. The weakening dollar also potentially threatens the industry as it will push up manufacturing costs.

 

 



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