The past two years have seen Essar Steel take several steps to look like a healthier version of itself. After reporting a net loss of Rs 1,054 crore in 2013-14, it turned a profit of Rs 466 crore 2014-15 in spite of the tough conditions faced by the industry as a whole: slowdown in demand and dumping from China, Japan and South Korea.
Some time back, the Union government provided some relief to domestic steel makers by imposing a safeguard duty on flat steel products, the kind that Essar Steel makes, and there is talk of a possible improvement in demand in the coming year.
A bigger concern for the Ruia family-controlled Essar Steel is its debt - Rs 34,928 crore at the end of March 2015 - the interest payout on which threatens its cash flows. While the company does not want to disclose it interest outgo, earlier this month, it gave some indication of how it plans to pare the stockpile of debt: it will induct a strategic investor.
Some analysts are of the view that the weak sentiment in the industry has brought valuations down to a level where strategic investors may be interested in the company. "The current down-cycle in the steel industry is fairly close to the bottom. Strategic investors enter with a 20-25 year perspective in mind and such down-cycles are ripe opportunities for them to come in, given that valuations are at a discount," says SKS Capital & Research Portfolio Manager Giriraj Daga.
The desperation among banks to exit Essar Steel, as they look to reduce their exposure to the stressed metal sector, could reduce the valuation further. Experts peg Essar Steel's current enterprise value at $6-7 billion. "As steel companies are over-leveraged, banks will be willing to take a significant haircut on the book value," says an analyst with a local brokerage.
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