India is pressing ahead with its plan to sell a stake in the biggest state-owned steelmaker in a race to cap the budget deficit, undeterred by a plunge in the shares to a four-year low.
The government will offer 10.82 percent of Steel Authority of India Ltd. (SAIL) on March 20 to raise as much as 35 billion rupees ($639 million), said two officials with direct knowledge of the matter. Teams comprising officials and bankers left this week on a nine-day roadshow to market shares in Singapore, Hong Kong, Tokyo, New York and London, the people said, asking not to be identified, citing confidentiality terms.
Slowing demand for the alloy in an economy poised to expand at the slowest pace in a decade and rising input costs have driven the stock of the New Delhi-based company 32 percent lower since the end of 2009. Prime Minister Manmohan Singh’s cabinet has twice deferred the sale in the past two years, believing a higher price would help narrow the widest budget shortfall among the biggest emerging economies.
“They ignored better times for the sale when demand was stronger and competition was weaker,” said Abhisar Jain, an analyst at Centrum Broking Pvt. in Mumbai, who recommends selling Steel Authority shares. “The return of those times may be far away. This smacks of despair.”
Steel Authority shares closed at 68.20 rupees on March 4, the lowest level since Dec. 5, 2008, according to data compiled by Bloomberg. They slid 1.9 percent to 69.10 rupees in Mumbai today, extending this year’s loss to 24 percent, versus no change in the benchmark S&P BSE Sensex. (SENSEX)
Finance Minister Palaniappan Chidambaram is under pressure to sell stakes owned by the government in companies including National Aluminium Co. (NACL), MMTC Ltd. (MMTC) and Rashtriya Chemicals & Fertilizers Ltd. (RCF) before the close of the financial year ending March 31 as he staves off a ratings downgrade threat issued last year by Standard & Poor’s and Fitch Ratings.
He cut the revenue target from stake sales for the year to 240 billion rupees ($4.4 billion) from an estimated 300 billion rupees as bureaucratic delays undermined the plan. He said on Feb. 28 that he will narrow the nation’s budget shortfall to 4.8 percent of gross domestic product next year from an estimated 5.2 percent in the 12 months to March 31.
Stockpiles at Steel Authority have increased because of a dearth of orders from government infrastructure projects, while competition from Tata Steel Ltd. (TATA), JSW Steel Ltd. (JSTL) and Essar Steel Ltd. has eroded prices of the alloy. The company had about 1.5 million metric tons of unsold stocks as of Dec. 31, more than half of the sales in that quarter.
“The inventory pile-up is raising concern the company’s capacity expansion may get further delayed,” Jain said. “If Steel Authority is unable to use its existing capacity, there’s no point expanding.”
India’s steel consumption rose 4.1 percent in the 11 months ended Feb. 28, according to the steel ministry’s Joint Plant Committee, half the pace the committee had estimated at the beginning of the year and slower than the 5.5 percent growth last fiscal year.
Steel Authority’s profit fell to 4.84 billion rupees in the three months ended Dec. 31, the lowest in more than nine years, dragged down by higher staff and raw material costs and a 6 percent drop in average product prices.
Cash reserves fell more than 30 percent to 59 billion rupees in 2012 from a year earlier amid a decline in earnings and increase in debt to fund a planned expansion. The board has advised that reserves be maintained at about 60 billion rupees, the two people said.
The government’s efforts to kick start the economy and stimulate demand will help the steelmaker, said Mumbai-based Umesh Patel, an analyst at KR Choksey Shares and Securities Pvt. that has a buy equivalent rating for the stock.
Prime Minister Singh’s recent policy steps include opening the retail and aviation industries to more foreign investment, easing caps on capital inflows and speeding up infrastructure projects. Chidambaram’s advisers have said growth will rebound to 6.7 percent next fiscal year from an estimated 5 percent this year. That would still be below the past decade’s average of about 8 percent.
“Steel Authority has undergone considerable pain along with other peers in the sector, but most of the bad news has been priced in,” Patel said. “The stock is trading at very attractive valuations and if the government offers a discount, it will be a compelling opportunity for buyers.”
The company is spending 721 billion rupees to expand crude steel capacity by 60 percent to 21.4 million tons, build new iron ore and coal mines and set up new machinery to enhance productivity. Loans will account for half the spending, the company said in a presentation last month.
Construction delays, difficulties in getting mining approvals and resistance from Maoist rebels have hindered the plan. While raw material supplies are just enough to feed Steel Authority’s 13.4 million ton capacity spread over five factory complexes in the country, meeting future requirements of iron ore may pose a challenge, said Giriraj Daga, an analyst with Nirmal Bang Equities Pvt. in Mumbai.
The company’s biggest mill in the central state of Chhattisgarh will run out of iron ore in five years, Chairman C.S. Verma said in August. It hasn’t been able to develop a new mine, fearing “violent reprisals” from Maoists.
It had to shut one of its biggest iron ore mines in the eastern state of Odisha in November after failing to get environmental approvals. The mine resumed work at 60 percent capacity about two months later. Another mine in neighboring Jharkhand has been closed since mid-2011, the people said. Steel Authority gets all of its iron ore from its own mines and imports 70 percent of its coking coal.
“The future will be more subdued for Steel Authority as interest and depreciation costs will offset gains from lower coking coal prices and higher sales volumes,” said Nirmal Bang’s Daga, who has a sell recommendation for the stock. “The company has been dependent on imported coking coal and in a couple of years its iron ore security may also come under risk if approvals don’t come fast.”
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