Faced with a threat of lenders monitoring its operations, Bhushan Steel has decided to raise equity up to $1 billion (around Rs 6,000 crore).
"The board passed a resolution on Wednesday to raise equity up to $1 billion.
"Whether we go for a qualified institutional placement or a rights issue, we will take a call later," Bhushan Steel's director (finance), Nitin Johari, told Business Standard.
The resolution comes days ahead of a lenders' meeting to decide on appointing a managing agency to oversee Bhushan Steel's operations, after the arrest of the company's vice-chairman and managing director, Niraj Singal, in the Syndicate Bank bribery case.
The amount is over 50 per cent higher than the company's Rs 3,850-crore (Rs 38.5 billion) market capitalisation on the Bombay Stock Exchange on Thursday.
Jittery over Bhushan Steel's Rs 40,000 crore (Rs 400 billion) debt exposure, lenders led by State Bank of India will be meeting on Monday.
Johari, however, feels such a move on the part of bankers was not warranted.
"Yes, we should have done it (raised equity) in the past but circumstances prevented us. First, the family dispute.
"A Company Law Board verdict in 2007 asked us to maintain status quo on capital.
"The family settlement ultimately happened in 2011, after which there was just one small window before the Budget in 2013 when we could have gone to market.
"But right after the Budget, the markets turned for the worse," Johari explained.
The Bhushan group split in the early 2000s.
While patriarch Brij Bhushan Singal and younger son Neeraj Singal, were on the same side, elder son Sanjay Singal turned adversary.
The father and younger son were managing Bhushan Steel (the listed company) and the elder son was managing Bhushan Power and Steel (the unlisted company).
The Singals finally arrived at a settlement in 2011, which said Sanjay Singal would get control and ownership of Bhushan Power and Steel, and Brij Bhushan Singal and Neeral Singal would control and own Bhushan Steel.
Family dispute apart, Bhushan Steel faced other roadblocks over the past few years. The coal block allocated to the Odisha project was rescinded in 2012.
"We signed an agreement with the Odisha government in 2005 and we fulfilled all our commitments.
"We did our bit but what about the raw material linkages that were promised?" Johari asked.
According to Johari, much of the debt could have been eased if iron ore and a coal mine, as promised by the Odisha government, had been in place. The company has already commissioned a 5.2-million tonne capacity in Odisha.
The commissioning got delayed, Johari pointed out.
Last year, one of the blast furnaces at the Odisha plant blew up, killing at least one person and injuring 19.
The furnace was sealed and in April this year, the company got permission to start a new blast furnace.
"The delay took a toll on finances," Johari said. The company is hoping to end the year with a top line of Rs 16,000 crore (Rs 160 billion).
"If all goes well, we will achieve a top line of Rs 22,000 crore (Rs 220 billion) next year," Johari added.
Bhushan had a high debt to equity ratio of 3.5 at the end of 2013-14.
The ratio rises to nearly four if deferred tax liability and other liabilities are included.
In 2013-14, Bhushan Steel's net sales declined by 10 per cent while operating profit and net profit declined by 18.3 and 93.2 per cent, respectively, over the previous year.
In comparison, interest cost was up 29.2 per cent to Rs 1,663 crore and at 60 per cent of company's operating profit.
In the past three years, the company's net sales have grown by around 50 per cent but its interest burden has more than tripled.
- Rs 3,850 crore (Rs 38.5 billion): Current market capitalisation of Bhushan Steel
- Rs 6,000 crore (Rs 60 billion): Equity to be raised by the company, 50% more than current market capitalisation
- 5.2 mn tonnes: The firm’s commissioned capacity in Odisha
- Rs 16,000 crore (Rs 160 billion): Estimated top line of Bhushan Steel this year
- Rs 22,000 crore (Rs 220 billion): Estimated top line of Bhushan Steel next year
- 3.5: Debt to equity ratio at the end of 2013-14
- 10%: Decline in Bhushan Steel's net sales in 2013-14
- 18.3%: Decrease in operating profit
- 93.2%:Decline in net profit
- 29.2%: Rise in interest cost to Rs 1,663 crore(Rs 16.63 billion)
- 50%: Growth in the company's net sales in the past three years
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