29-03-2016

India: Steel companies shed power to lighten debt

steel

In 2006, erstwhile Monnet Ispat Ltd took up a new name Monnet Ispat and Energy Ltd to reflect the true nature of the activities in which the company was engaged in, which was to include steel making and power generation.

Fast forward 10 years and Monnet Ispat and Energy is said to be in discussions with Sajjan Jindal-promoted JSW Energy Ltd to sell its power subsidiary Monnet Power Co. Ltd.

Monnet Ispat is not an exception. More steel makers are now divesting power assets to stay afloat in a weak steel market. Jindal Steel and Power Ltd and Adhunik Metalliks Ltd are two such steel companies looking to partially or fully exit their power portfolios.

According to people directly involved in the discussions, Jindal Steel and Power is likely to soon close a deal with JSW Energy Ltd for about 1,000 megawatts (MW) of its 3,400 MW power capacity.

Bankers to Adhunik Metalliks Ltd, according to several news reports, has started the process to find a buyer for its subsidiary Adhunik Power and Natural Resources Ltd’s power assets.

To be sure, the three steel manufacturers are under tremendous pressure to meet debt obligations. As on 31 December 2015, standalone debt for Adhunik Metaliks was Rs.2,051.10 crore and that for Monnet Ispat was Rs.6,627.07 crore. For Jindal Steel and Power, consolidated debt as of December 2015 was Rs.42,534.04 crore.

Adhunik Power has an operational power capacity of 540 megawatt (MW) and Jindal Steel and Power 3,400 MW, while Monnet Power’s capacity of 1,050 MW is still under execution. Calculated at Rs.6 crore per MW as cost, Adhunik could get up to Rs.3,240 crore for the plant. The valuations for Jindal Steel’s 1,000 MW power capacity up for sale to JSW is being valued upwards of Rs.5,000 crore.

Salil Garg, director, corporates, Indian Ratings, said given these power assets are not captive in nature, it is easier to divest. “Most of these power plants were set up for non-captive purposes so are easier to dispose off,” he said. These power assets were set up as independent power units which sell power to a third party and not for use of the company’s own industrial units. Thus, sale of these power units will not impact the overall steelmaking operations.

Most of these steel companies entered the power generation sector as independent power producers a decade back. Jindal Power Ltd, JSPL’s power subsidiary, commissioned its first non-captive power unit in 2007. Monnet announced its power generation ambitions in 2006 and two years later Adhunik announced its entry into power generation. Garg credits these ambitions to the expertise steel companies already had in running a captive power plant. Power generation back then was a lucrative business with spot prices for power also touching new highs.

These power ambitions are now helping steel companies find a quick and temporary fix to address debt woes. The challenge, however, would be to conclude these deals as the power sector isn’t flush with buyers.

For instance, Monnet’s discussions with JSW Energy have been underway for several months now, is still awaiting a final agreement. Naveen Jindal-promoted Jindal Steel and Power may strike luck faster with JSW Energy as people directly involved in these discussions indicate an agreement may be in place before the end of this month.

Will steel companies drop the ‘power’ off their names? Maybe. Maybe not.

Source: Livemint

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