Companies & Sectors
JSW takes over Ispat Industries

The saga of continuing losses at Ispat Industries and repeated fund injection by banks and financial institutions is over. It is reliably learnt that JSW controlled by Sajjan Jindal has clinched the deal to acquire Ispat Industries.

The promoters of Ispat Industries, Promod and Vinod Mittal, who have been struggling to keep the plants of Ispat Industries running since October and pay salaries on time, has finally thrown in the towel.

It is reliably learnt that the consortium of banks, which lent a helping hand to Ispat for over a decade, has now finally got the Mittals to relinquish control over Ispat in favour of Sajjan Jindal controlled JSW Steel, India's third-largest steel producer.
A meeting of lenders, which includes IDBI, ICICI Bank, IFCI and State Bank of India and others, has been called on Monday to implement this decision.
According to sources close to the transaction, JSW Steel and entities controlled by Sajjan Jindal, are buying 45.5% stake in Ispat Industries through a fresh issue of shares. This will trigger an open offer. After the deal, Mittal (mainly Vinod Mittal) and family will continue to hold close to 26% in Ispat.
Moneylife reported on 1st December that Ispat was facing in an acute cash crunch, which forced the closure of the company's electric arc furnace in Dolvi, Maharashtra, which has a capacity to make 3.3 million tonnes of steel and also the cold rolling and galvanizing mill at Kalmeshwar, near Nagpur.
A sell-out by the Mittals at this stage was inevitable, as Moneylife has been hinting in its various reports in December. After almost two decades of severe mismanagement, Ispat has been way behind in meeting every commitment to the lenders.
In a remarkable case of management failure, Ispat has posted losses for each of the past five years except 2008, a period which saw a steel market booming worldwide, leading to highest ever steel prices.
With over Rs7,000 crore debt on its books, Ispat Industries has been under a Corporate Debt Restructuring (CDR) plan.
However, the company has been failing quite miserably to stick to its commitments. A report of the lenders dated 22nd October says that the Lenders' Monitoring Committee (LMC) "felt that in order to bring financial discipline in the company, TRA mechanism should be strictly implemented immediately and close monitoring for the same is required by the TRA bank, viz. SBI." (TRA stands for Trust and Retention Account.) The report goes on to state that "the company was directed to submit expenses budget on a monthly basis in advance in respect of subsequent month to the lenders for their examination and approval by the LMC for effective monitoring of TRA." The report goes on to discuss the various compliance steps that Ispat has failed to take as part of the CDR.

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V Jayaraman

7 years ago

This is a classic case of allowing drowning public money into the ocean. I am sure in the scheme of things which shall be sought by JSW Steel, they would look for good amount of haircuts on the IIL loans. This would erode profitability in a big way for lenders like ICICI Bank, SBI etc. This would also allow Mittals to keep intact with them the real estate company having building in Pedder Road, Mumbai. With this merger talk, the Banks / Institutions should seize the opportunity of Mittals going ahead and gaining from the real estate project. I fail to understand why should Mittals should hold 26% and issue fresh shares to JSW Steel. Instead, the lenders should have insisted that Mittals offload their portion to JSW Steel or in the alternate allow the pledged shares of Mittals with Banks / FIs to be handed over to JSW Steel. Hapless minority shareholders can stand in queue in the next AGM of IIL. JSW Steel shall bring laddoos from Tirupati and shall distribute to minority shareholders of IIL (in lieu of dividend which cannot be dreamt of atleast for the next 5 years).

What sealed Ispat’s fate?

While the Mittals brothers had run out of options to raise more cash, the financial institutions were facing Rs10,000 crore of bad loans and JSW was keen to wrap up the deal 

Three things seem to have sealed Ispat Industries Ltd’s (IILs') fate – firstly, pressure from government agencies, especially the Income Tax department that recently conducted nationwide raids/searches on the company and its promoters. Secondly, lenders are under severe pressure because they would have to declare over Rs 10,000 crore of outstanding borrowings as bad loans if some solution was not found before 31st March. Also, with the loan-for-share scam having badly burned lenders such as Life Insurance Corp of India (LIC) and LIC Housing Finance, even the most sympathetic lenders were scared to bend the rules for the Mittal brothers once again. Finally, IIL was unable to pay salaries and utility bills and it was clear that any delay in selling the plant would have led to vandalization and reduced value.
All this cornered Pramod and Vinod Mittal and created an environment that was ideal for potential acquirers to mount pressure on bankers as well as through political contacts. We learn that even between the two siblings, Vinod Mittal was ready to walk out if he got a good deal.
Good for the Industry
With a large, weak player being taken over by a strong group, the prospects of the steel industry have dramatically brightened, say insiders. Indian steel prices, especially hot rolled coils (HRC), have often quoted below international prices because IIL, perennially short of cash would often sell at a discount to the market prices. Industry now expects prices to move up to market determined levels. One major factor that may turn out to be a worry is that henceforth, the Jindal group along with the Essar group (earlier a major defaulter itself) will now control over 70% of the market for HRC – a product that is used to make consumer durables like cars, washing machines etc.

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Forecast 2011: Nomura expects EMs to outperform; year of consolidation for India

Nomura says China will contribute three times as much as the US to global growth in 2011. India, the brokerage says, will contribute as much to global growth as Western Europe and Japan combined

Nomura, the global financial services firm, expects overall global GDP growth at 4.3% with developed market growth at 2.2% and emerging market growth at 6.6% in the new year. The US is expected to grow at 2.5%, with the best growth in Latin America expected Chile at 6.5%. The Asia Pacific region is expected to grow at 6.7%. Australia, New Zealand and Indonesia will see steady growth, while Japan, China, Hong Kong and India are expected to have moderate growth, whereas growth in Singapore, Thailand and Taiwan may fall sharply.

Nomura believes inflation in the developed world will be contained, but it expects the European Central Bank (ECB) and the Bank of England (BOE) to raise rates way ahead of the US Fed and the Bank of Japan (BOJ). Inflationary pressures will mount in emerging markets as funds keep flowing in and the authorities intervene to stem rising currencies.

In its report published recently, Nomura says India’s GDP growth should consolidate at 8% year-on-year in 2011, after a strong 8.8% in 2010 on account of three factors: (1) Agricultural output will normalise and growth will be lower due to base effects. (2) Growth in government consumption will slow. (3) Net exports will be a larger drag on growth as imports pick up in line with improving domestic private demand.

Nomura expects private consumption in India to remain strong, supported by rising wages and good rural demand. “We expect investment to be led by infrastructure, real estate and services sector capex.” The brokerage expects inflation to remain elevated (averaging 7.3% through 2011) due to a structural rise in commodity prices and a closing output gap that will result in greater demand-side inflation. Nomura also predicts that persistently higher than expected inflation will lead to up to 75 basis points of rate hikes from the RBI. “This will come on top of the aggressive 150bps of hikes in 2010 shifting the monetary policy stance to modestly tight.” 

“We judge the year 2011 to be a year of below-average returns for the market and set our December 2011 Sensex target at 22,100, implying a potential market return of around 12%. We expect some downside to consensus earnings growth expectations of approximately 20% year-on-year. At the same time, the policy environment will likely tighten more than expected, restricting premium expansion for equities,” says Nomura.

Inflation, consumer demand and labour shortages in India should be keenly watched, the brokerage suggests. A global rise in commodities could provide a huge spike to India’s inflation. The pick up in the investment cycle for 2010 has been disappointing, it says. “This has been because of a host of factors, including muted risk-taking ability on an aggregate basis, uncertainty in the macro environment, problems of resource shortages (difficulties in land acquisition and scarcity of labour) and policy hiccups in infrastructure areas, especially in telecom and roads. The recent slew of scandals and scams implicating the government will also likely impede the investment cycle.”

For Asia, rising inflation will be a big macro theme and it will be difficult to control if countries keep holding back appreciating exchange rates, Nomura says. For China it expects 9-10% growth in 2011-12 as the government implements structural policies to promote consumption, and in India supply constraints will keep inflationary pressures elevated, even as growth consolidates in 2011. Australia's GDP growth will lift sharply from mid-2011 on much stronger capex in the resource sector.

In fact, one key grouse Nomura seems to have with emerging market policymakers is that they are “prone to resist nominal exchange rate appreciation by stepping up foreign exchange intervention and imposing distortionary capital controls, with the result that over time the real exchange rate appreciation will likely end up occurring via domestic overheating and inflation.”  It worries that rising food and commodity prices create particular challenges for emerging economies given the importance of food in their CPI baskets. It votes for more flexible exchange rates that would also allow these economies to better absorb such price shocks. It warns that “the scope for inflation to overshoot on the upside in EMs is on the rise.”

Key overall global downside risks include an escalation in the euro area fiscal crisis, an investment pull-back in China, or the EM overheating turning sour, says Nomura. It expects the US dollar to consolidate against major currencies but weaken against EM currencies.

In China, Nomura expects government policies to focus on enforcing better working conditions, large minimum wage hikes and social welfare reform. Exports will grow at only 12%, low by Chinese standards, says the brokerage, but imports at 14% will be stronger due to strengthening domestic demand. China’s CRR is expected to rise to 20.5% in 2011 from 18% in 2010.

For the US, the brokerage sees a slow recovery process mainly because of several headwinds. It believes that reforms in the financial and healthcare sector could actually prove detrimental to hiring and therefore growth. While household debt still remains at excessive levels, household deleveraging will limit consumption. State and local government budgets are under pressure, housing recovery is still shrouded in uncertainty, and employment will improve but very slowly. Nomura believes the Fed’s $600 billion treasuries-buying programme will be enough to boost growth and stabilise inflation expectations. With the huge deficit looming large, fiscal policy will shift toward long-run reforms of taxes and entitlements.

For Europe, it believes there will be “gradual recovery in UK growth despite the dampening effect of deleveraging and fiscal consolidation. Inflation will likely stay above target during 2011 in the UK, and hover around the 2% target ceiling in the euro area. We expect no further QE with a first BOE rate hike in August 2011, the ECB’s in September 2011.” For the UK, Nomura is optimistic that the tailwinds of loose monetary policy and the persistent weakness of sterling will prove stronger than the headwinds of the fiscal consolidation programme, poor credit availability, a deterioration of real wages and a shaky housing market.  For the Euro area as a whole, consumer spending looks set to increase in 2011 and 2012, as labour market conditions improve and the unemployment rate starts to decline from early 2011.

Nomura expects the Japanese economy, which has hit a soft patch, to start recovering by mid-2011. It actually expects Japan’s CPI to turn positive by the end of 2012, marking Japan’s exit from its deflationary phase. “For the FY11 budget, deliberations are under way to reduce Japan’s corporate tax rate for the first time in about 12 years. We expect Japan’s central bank to implement additional monetary easing measures in response to a renewed upsurge of the yen, resulting in an increase in the asset purchase programme to ¥8–10trillion.”

For Russia, the recent severe drought and rising inflation will remain overhangs in 2011. However, there are things to look forward to. “The government accepts that the development of the economy is being hindered by the high level of state ownership, and has therefore announced a large privatisation programme for 2011-15, which should generate about $50 billion in revenue.” However, none of this will flow through in 2011. Another positive, Nomura points out, is that Russia has nearly ironed out all differences with the EU and US, and a possible entry into the World Trade Organisation in the second half of 2011 will be a positive.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author’s own and may not necessarily represent those of Moneylife.) 


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