As banks tighten grip, Bhushan looks at infusion lifeline

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Moneycontrol BureauAfter the arrest of its vice chairman Neeraj Singhal in a bribery-for-loan case, Bhushan Steel is under increasing pressure to infuse more funds to assure lenders it can service its mammoth Rs 40,000 crore debt burden.Bhushan was caught in the eye of a storm after Singhal’s arrest triggered a rush among bankers, who have decided to take control of the firm by taking up key board seats and have called for two audits – of the use of funds the firm borrowed and its current cash position.

India’s sixth-largest steelmaker by capacity is also one of its most debt-laden, with a debt-to-equity ratio of about 3.5 times, among the highest in the industry.Bhushan, which operates plants in Maharashtra, Odisha and Uttar Pradesh producing 2.7 million tonnes of steel (another 2.5 mt to be commissioned this year) has agreed to pare its debt but has sought time from banks to be able to sell some of its non-core assets.

But for now, banks want it carry out a sale-and-leaseback that would help it raise immediate funds and ease its debt position, while help in continuing to run operations smoothly.While an equity sale looks difficult given the crash in the stock price – it has fallen about 62 percent since news of Singhal’s arrest broke out – a Hindu Business Line report said the company is looking to raise Rs 6,000 crore via redeemable preference shares.Raising further debt may also look difficult given the slew of downgrades the firm’s debt issues have witnessed: it has witnessed its debt downgraded by six and 16 notches by CARE and Bricworks, respectively, in the past few months on account of the high debt and the operational stress it places.For now, Bhushan’s debt has been rated as standard by banks who have exposure to the company but time appears to be running out for it as it faces an imminent threat of a takeover or have its assets stripped down threadbare.Even so, some analysts say that even as the stock could trade pressured in the near term, the mammoth crash in its price could sense a “high-risk, high-return play” for investors.After all, a company with an expected steelmaking capacity of about 5 mtpa is being quoted at about Rs 3,000 crore market capitalization when 1 mtpa capacity expansion costs about Rs 3,000-4,000 crore.“Bhushan Steel is high-risk, high-reward for investors looking from a two-three years’ perspective but only below Rs 100 levels. While we are expecting the steel industry outlook to improve, we don’t know how big the hole is in the books of Bhushan Steel. On an enterprise value basis, its value should be Rs 42,000-45,000 crore, looking at the gross block and the capital work-in-progress,” Giriraj Daga of Nirmal Bang told Business Standard. “We believe it will be difficult for existing management to revive, as rating agencies have also downgraded the debt. Bankers have limited options but to take over the company and sell it to a third party who will bring in money.”