Bhushan Steel: a creditworthy company

turned insolvent
Hemant Manuj

The dilemma Hemant Manuj is Associate

Professor at the
Rajan Sharma was a Senior Relationship Manager (SRM) at one of the top private banks Department of Finance,
who had lent to Bhushan Steel Limited (BSL/the company), a large Indian steel maker. On S P Jain Institute of
10 June 2013, Rajan received a proposal to enhance the long term credit limit of BSL by 50 Management and
per cent. BSL was financed by a consortium of bankers. Research, Mumbai, India.

Rajan, an alumnus of Indian Institute of Management Ahmedabad, a premier business

school in India, had been a banker for 20 years. He was perceived by his colleagues as an
aggressive banker willing to take bold decisions, if required. He was known to engage in
extensive networking and partying which would keep him abreast of the banking and
corporate industry updates.
Rajan had witnessed the Indian steel sector growing sixfold over his career of 20 years. He
had no doubt about the long-term growth prospects of the Indian steel industry. With the
high quality of steel assets, BSL was a significant player in the steel industry. The company
was doing quite well, operationally, and had plans to grow significantly over the next five
years.
However, lately, Rajan had also been reading recent research reports indicating that the
global trade was slowing down. He had greyed his hair in the trenches of banking and had
already witnessed two significant down-cycles in his corporate banking career. The first
was during the beginning of the 2000s (post Asian crisis), and the second was post the
2008 global financial crisis. The steel industry, he knew, was particularly susceptible to
global business cycles.
So, Rajan was in a dilemma on how to handle a potentially large account.
If he approved the increase in credit limit of BSL, it would lead to an increase in leverage of the
borrower company, implying higher risk, especially if an impending down-cycle in the steel
industry came to be true. He would, of course, have the comfort of being aligned with several
This case has been written
other bankers, who were vying for increased business from a fast-growing company. based entirely on secondary
data; hence the consent of the
If Rajan decided to bypass the proposal, he could lose a large client. He would be organisation is not required.
swimming against the tide of several bankers lending to BSL. This could be a big risk for The references/ sources of data
for the case have been listed at
him and also, to some extent, for the bank, if BSL eventually turned out to be a good credit. the end of the manuscript.

Rajan had to decide soon and then send the credit appraisal memo (CAM) to Sanjay, a Disclaimer. This case is written
solely for educational purposes
Senior Credit Officer (SCO) at the bank. The Senior Credit Officer, Sanjay, was known for his and is not intended to represent
sharp questions and critical analysis of credit proposals. Rajan had built a significant trust successful or unsuccessful
managerial decision-making.
based relationship with Sanjay over the years. It was important for him to convince Sanjay The authors may have
disguised names; financial and
that the proposal had been suitably analysed and the risks had already been fairly other recognisable information
evaluated by him. to protect confidentiality.

DOI 10.1108/EEMCS-12-2017-0263 VOL. 9 NO. 1 2019, pp. 1-30, © Emerald Publishing Limited, ISSN 2045-0621 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 1
 Rajan called up Sanjay and asked him, “Hi Sanjay, I am close to finalising the Credit
Appraisal Memorandum (CAM) for the fresh loan proposal for Bhushan Steel. Can we meet
tomorrow at 3 pm to discuss this?”
Sanjay: Well, we can meet at 3 pm tomorrow. But I was just wondering if you are really happy
recommending this proposal.

Rajan: You’re right, Sanjay. As I had mentioned in our last meeting, I am not fully confident about
BSL this time. However, it is not a case to be “rejected” either. In fact, I have got a fairly positive
market feedback on this.

Sanjay: Oh, market feedback!!

Rajan (Laughs): Sanjay, I know your views on the current market. Anyway, let’s meet tomorrow
and I will take you through the details.
Sanjay: Ok, fine, we will discuss when we meet.

Rajan took a sigh and looked out of the window of his cabin. He could see the trees, but not
much beyond that. He was wondering what level he should pitch the case at, when
proposing it to Sanjay.
Should Rajan recommend an increase in exposure to BSL or reject the proposal?

Background
BSL was set up in 1989. By 2013, it had grown into one of the largest players in the steel
industry with an installed capacity of 4.7 million tonnes per annum (MTPA) of primary steel.
The company manufactured and sold hot rolled coil/sheet, cold rolled coil/sheet, galvanized
coil/sheet, high tensile steel strapping, colour coated coil/sheet, galume coils/sheets,
hardened and tempered steel strips, precision tubes, etc. Its products cater primarily to the
demand of automobiles and consumer durable industries. The company had technical
collaboration with globally renowned technology partners, and produced the finest quality
of auto-grade steel. To boot, it had, as its clients, the top automobile companies, like Maruti
Suzuki, Mahindra and Mahindra, Ashok Leyland and Tata Motors.
The stock of the company was traded on two premier exchanges, i.e. the Bombay Stock
Exchange and the National Stock Exchange. As of March 2013, the promoters of the
company, i.e. the Singhal family, owned 59 per cent of the equity shares, and also held key
positions in the Management as well as on the Board of Directors. The chairman of the
company, Mr B B Singhal, was the patriarch of the promoter family.
The Board comprised ten members, of which four were independent directors and one was
a nominee of the lenders. The Audit Committee of the Board had four members and was
chaired by an independent director. The promoter, Mr B B Singhal was also a member of
the Audit Committee.
In 2004, the Indian economy had bottomed out and the prospects for the steel sector were
seen as very bright. As BSL progressed with the construction of its steel plant in Odisha in
2005, it also planned to implement backward integration with the production of iron ore and
coal, which would be required to make steel. The first phase of construction was completed
by 2009-2010.
The global demand for steel was supported, for the most part of the 2000s, by the Chinese
demand. After the 2008 Chinese Olympics and the global financial crisis, demand for steel
in China as well as the rest of the world began tapering off. However, the Chinese
production kept growing, leading to narrowing of the demand–supply gap and resultant fall
in global steel prices.

PAGE 2 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

The Company, however, continued with its expansion and backward integration plans, as it
believed that the integration would be a source of competitive advantage. The Annual
Report of the company, for 2011-2012 conveyed the optimism of the promoters and the
management. It stated as follows:
At Bhushan Steel, we have been mastering the art of steel making with efficiency, profitability
and sustainability. From 0.12 MTPA of secondary steel in 1989 to first captive power plant of
12 MW in 1997 to foray in primary steel with 1.9 MTPA plant in 2006 to 4.4 MTPA total capacities
and 355 MW captive power plant today, our journey has been that of a phenomenal growth. Steel
making being amongst the most capital-intensive businesses, we took cognizance of our
responsibility to become an efficient, self-reliant and sustainable business at the right time with
the right intensity. Today, with total capacities in sight to be 5 MTPA upstream and 2.2 MTPA
downstream by FY13, we equal the intensity of focus on raw material, manpower and logistics
integration. Our relentless planning and execution towards integrating all the important raw
material and infrastructure like thermal coal, iron ore, coking coal, water and power has started
showing initial signs of success. Development work on iron ore, coal mines and water resources
is progressing well apart from our continuous addition of Captive Power.

In the meantime, the political and business climate in India had become challenging by
2011-2012. The opposition parties were levelling serious charges against the Congress
led coalition government. These were based on several reports published by the
Comptroller and Auditor General (CAG) of India. In March 2012, there were media
reports of the CAG being critical of the government for wrongful allocation of coal
blocks to various companies, including BSL. Later, in November 2012, the Indian
government had to cancel the allocation, of coal mines, to several power and steel
companies in India. This was not a surprise, as the possibility of cancellation of coal
blocks had been talked of by the market players for several months now. In this
process, the license to the Tatrapada (Odisha) based coal mine held by Bhushan Steel
was also cancelled.
The company continued with its expansion plans in 2013-2014. The expansions were
related to a coke oven plant (1.3 MTPA), coal washery (2.5 MTPA), DRI kilns (0.34
MTPA) and power plant (197 MW) at Meramandali, Odisha. Additionally, the
downstream steel capacity was planned to be further increased from 2.2 to 4 MTPA by
FY17.
The expansion of its steel plants was completed in 2015. The company ranked as India’s
third largest producer of secondary steel, with a capacity of 5.6 MTPA. BSL emerged as the
sole Indian company operating a cold rolled steel plant with an independent line for
manufacturing cold rolled coil and sheet up to a width of 1700 mm. Along with this it also
had a galvanized coil and sheet (GCS) line up to a width of 1350 mm.
In March 2017, BSL was allotted, by the Indian Government, a license to develop and
extract iron ore from an iron ore mine at Kalmong West block in the state of Odisha. As it
took a few years to develop the mine, the company continued to depend on external
(imported well as domestic) sources for the supply of coal and iron ore.
The journey of BSL from 2011to 2012 onwards was a bumpy one. However, the Annual
Reports of the company continued to reflect optimism. The attitude of the Board of Directors
(Board) reflected either indifference or being influenced by the promoters. This would often be
the case in many Indian companies, where the independent directors would not question the
promoters. The promoters, with majority stakes in their companies, would not like independent
directors coming in the way of their unhindered business plans.

Financing of expansion by Bhushan Steel Limited

Between 2008 and 2010, the long-term loans of the company had more than doubled from
Rs. 46bn to Rs. 109bn (Exhibit 2). The company went on with further aggressive borrowings

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 3

 to finance the next phase of its expansion and integration plan. The company had borrowed
from 51 banks, which included almost all banks in India.
In 2013, BSL was discussing with the banks for enhancing its credit facilities. The latter
were quite enthused with the past track record and promising growth prospects of BSL. The
credit rating of the company, as appraised by an external rating agency, CARE, was at an
investment grade, A+. The loans of the company were secured against various assets. The
loans from the banks were secured with a mortgage against all immovable properties. The
promoters had, in addition, signed on a personal guarantee and also pledged the shares,
held by them, as security for the borrowings. The proportion of shares pledged, to those
held, by the promoters increased from 25 per cent in 2011 to 70 per cent in 2014.
The banks examined the projected financials of BSL, which assumed rising steel production
as well as steel prices, and lower cost of production on the back of full integration. They also
took comfort from the personal guarantee and pledge of shares committed by the promoter
(Figure 1).

Rajan’s proposal
Rajan faced a dilemma which is typically associated with the role of a relationship manager.
BSL was doing quite well in its operations till 2012. While there were some early signs of
deterioration, the other banks were quite eager to lend to BSL. In such a situation, it would
have been a brave call for Rajan to let go of an opportunity to expand his business
relationship with BSL.
Rajan’s realised that he was not quite enthusiastic about the proposal. He also knew that he
was being different from the majority of lenders, but he stuck to his thought process. He
decided to propose to Sanjay that the Bank could hike the credit limit, but only with the
following caveats:
䊏 an increase in interest rate by 50 bp;
䊏 a higher value of collateral security compared to the existing package; also, the
collateral should now be something different from the shares of BSL;
䊏 disbursement of the loan amount in phases, based on milestones of the project
completion; and
䊏 significant amount of additional equity capital should be brought in by the promoter.
Rajan knew that it would be difficult to convince BSL to accept these additional conditions,
especially when many other banks were not keen to impose any such conditions. However,
Rajan was aware that the loan was now riskier than one year back and hence deserved
suitable covenants attached to it. Otherwise Sanjay would also not accept it.

Figure 1 Capital structure

PAGE 4 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Rajan, of course, was not fully clear in his mind. He was still wondering whether he was
being too harsh on BSL and was risking loss of a potential business opportunity.

Going forward
Even as the company expanded its production capacity, the Chinese steel prices had fallen
from a peak price of Yuan 6,200/tonne in 2008 to Yuan 5,100/tonne in 2013. The Indian steel
manufactures complained to the Indian government against the dumping of steel at low prices
by international steel companies, especially Chinese, Japanese and Korean companies. The
government imposed anti-dumping duty ranging from 4.58 to 57.39 per cent of landed value
on cold rolled flat products of stainless steel from China, Korea, European Union, South Africa,
Taiwan, Thailand and USA in April 2014. While this affected the Chinese imports, it did not help
to counter the imports from other countries, especially Japan and South Korea, as India has
had free trade agreements with these two countries.
Even as the steel prices were falling, the bankers to the company had been hoping that the
performance of the company would improve, after the expected completion of the final phase
of expansion in 2014. Also, the backward integration into iron ore and coal was expected to be
completed by 2016. These developments were expected to lead to a significant increase in
revenues and profits. The company stated in its Annual Report for 2013-2014, as follows:
During the year the Company has faced multiple challenges due to suppressed economic conditions
and delay in stabilising Phase III operations due to unfortunate accident. On account of these
challenges, the Long Term Credit Rating of the Company was also down-graded to Care BB (Double
BB) and Short Term Credit Rating was downgraded to CARE A4 (A Four).
Despite these challenges, your company’s bankers have demonstrated continued confidence
on the company and during the year following major credit facilities were extended:

䊏 Corporate loan of Rs 42bn for shoring up of net working capital/normal capex

requirements of the company. The company has tied up corporate loan of Rs 35.75bn
out of Rs 42bn from 14 banks and the tie up for the balance amount is in process.
䊏 Term loan of Rs 27bn for addition, modifications and replacement (AMR) scheme
project at Orissa. The company has tied up the term loan of Rs 15.6bn out of term loan
of Rs 27bn from eight banks and the tie up for the balance amount is in process.

Enhancement of working capital facilities by working capital consortium led by Punjab National
Bank for Rs 113.9bn (fund-based limit of Rs 53.9bn and non-fund-based limit of Rs 60bn).

In November 2013, the new plant’s furnace exploded during testing, leading to three
workers being killed and twenty nine injured. The accident was widely covered in the press.
In the same financial year, ending March 2014, the net profit of BSL declined to Rs 58cr
from Rs 904cr in the previous year.
On August 1, 2014, the Centre Bureau of Investigation (CBI) alleged that the company had
bribed the chairman of Syndicate Bank for an extension of its credit period, as it had defaulted
on a Rs.100 crore loan repayment to the latter. Neeraj Singhal, one of the co-promoters and
Managing Director of the company, was arrested on 7 August 2014. This news led to a sharp
fall in the BSL stock price from Rs 394 on 1 August 2014 to Rs 91 on 2 September 2014. The
trading on the stock would be practically halted every day, after it hit a lower circuit of 5 per
cent within a few seconds of the opening of trading every day. This meant that anyone holding
a significant quantity of shares (i.e. more than Rs 1bn) could not sell the shares for one month.
This would eventually lead to a loss of 77 per cent on the value of the shares held. Later, the
stock could never recover to even half of its initial price for the next three years.
The banks were now stuck with the loans, even as the company made a loss in 2015. Most of
the banks classified the account as a non performing asset (NPA) in their books by June
2015. The banks formed a joint lending forum (JLF) to evaluate the possibility of

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 5

 restructuring of the loans. The consortium of lenders included more than 35 banks.
Restructuring of loans is usually done by extending the repayment period, reducing the
interest rate, or providing additional funding to a borrower. After several rounds of
failed negotiations with the promoters for a simple restructuring, the banks began
evaluating, in July 2016, the option of restructuring of loans to BSL under the
Sustainable Structuring of Stressed Assets (S4A) scheme. This was recently introduced
in the banking laws by the Reserve Bank of India (RBI, the Central Bank), as a means of
deep restructuring, Under S4A norms, in case of companies where promoters were
unchanged, a part of the unsustainable debt owed to the banks would be converted
into equity shares allotted to the latter.

Default and recovery of loans

The restructuring of the loans by the banks was not successful in curing the default on
the loans or in recovering of over-dues. As defaults continued into 2017, a business
daily reported that the State Bank of India (SBI) – led lender consortium asked Deloitte
India to conduct a forensic audit, and approved restructuring of its loans to the
Company.
On 7 June 2017, a business daily reported that the Serious Fraud Investigation Office
(SFIO) was investigating if Bhushan Steel’s management had diverted any bank
loans.
The banks have initiated a process for recovery of over-dues on the loans. On 26 July 2017,
under the recently introduced Insolvency and Bankruptcy Code 2016 (IBC), an application
for insolvency, filed by SBI against Bhushan Steel, was admitted and approved by the
National Company Law Tribunal (NCLT). As per the Code, an executive of Deloitte Touche
& Co. was appointed as the interim insolvency professional (IP) for the resolution of
insolvency of the company. The company would now get 180 days, extendable by another
90 days, to agree to a resolution plan, acceptable to the banks. If they could not agree to a
resolution plan, the company would be liquidated.

Industry overview and peer group comparison

An overview, and the trends, of the Indian steel industry is presented in Exhibit 3. The long-
term outlook of the sector has been bright.
By the year 2015, several large corporates in the Indian steel sector had been reporting
losses. This included other leading steel producers like Tata Steel, Jindal Steel and Power,
and Essar Steel. Of course, there were a few large steel producers like JSW Steel and Steel
Authority of India that continued to report profits. While Essar Steel reported a profit in 2015,
it slid back into huge losses from 2016.
A summary snapshot of the profits and solvency ratios of the large steel making companies
is presented in the Exhibit 5.
Keywords:
One of the leading companies in the steel sector, Tata Steel, also suffered setbacks after
Banks/banking,
Management accounting/ 2012. A brief snapshot of Tata Steel during the same phase is presented in Exhibit 6.
corporate finance,
In summary, it can be stated that the failure of Bhushan Steel has been on account of
company/company
failure Corporate factors that should have been considered by the management and the lenders. It is not
governance, enough to produce high quality products and invest in expansion. The trajectory of
Credit/debt management, growth of business should also be determined by sound principles of investment
Bankruptcy/liquidation
decisions.

PAGE 6 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Further reading
Bhushan Group website (2019), available at: www.bhushan-group.org/home.html
Financial statements of Bhushan Steel Limited (2019), available at: www.moneycontrol.com/financials/
bhushansteel/consolidated-profit-lossVI/BS14
Livemint (2019), “Bhushan Steel lenders to restructure loans – Vishwanath Nair, live Mint”, available at:
www.livemint.com/Companies/RVPIcHk97jPtTBzRJ65A8O/Bhushan-Steel-lenders-to-restructure-loans.
html (accessed 7 October 2016).
NPA crisis (2017), “NPA crisis: the rise and fall of Bhushan Steel into the great Indian debt trap – Aman
Sethi”, Hindustan Times, available at: www.hindustantimes.com/business-news/npa-crisis-the-rise-and-
fall-of-bhushan-steel-in-the-great-indian-debt-trap/story-GHrvRRFIBsMLXKJzbqvaFN.html (accessed 8
August 2017).
NIC (2019), “Anti-dumping duty on steel imports”, available at: http://pib.nic.in/newsite/mbErel.aspx?
relid=167492
Tata Steel (2015), “Tata Steel investor presentation”, available at: www.tatasteel.com/media/1336/q4-
results-presentation_fy15.pdf

RBI (2019), “RBI guidance note on credit risk management”, available at: www.rbi.org.in/scripts/
NotificationUser.aspx?Id=905&Mode=0
Ross, Westerfield, Jaffe, and Jordan (2019), “Capital structure – limits to the use of debt”, Corporate
Finance, Chapter 17.

Exhibit 1. Credit rating of Bhushan Steel Limited

Table EI Credit rating of Bhushan Steel

Credit rating by CARE
Year Long term Short term

2009 BBB
2010 BBB+
2011 A+ A1+
2012 A+ A1+
2013 A+ A1+
2014 BB A4
2015 BB A4

Rating rationale for the rating awarded by CARE in 2013

The ratings continue to factor in the resourcefulness and experience of Bhushan Steel Ltd
(BSL’s) promoters, the company’s established track record in the steel industry and its
consistently healthy operating margins over the years. The ratings also derive strength from
BSL’s diversified customer base, the company’s dominant position in the domestic market
and its diversified product portfolio with a strong export presence in GP/GC sheets and
other value-added products. Furthermore, the ratings also take cognizance of
the completion of the company’s Orissa Phase-3 project and right issue of Rs.4.74bn. The
ratings are however constrained by BSL’s leveraged capital structure attributable to the
large debt-funded expansion projects, the company’s moderate debt coverage indicators,
risks related to the projects under implementation and the cyclicality inherent in the steel
industry. Going forward, the company’s ability to achieve the envisaged revenue and
profitability and completion of various projects under execution within the time and cost
estimates shall be the key rating sensitivities. Furthermore, the company’s ability to improve
its capital structure would remain crucial for its credit profile going forward.
Source: CARE Ratings (http://www.careratings.com/upload/CompanyFiles/RR/BHUSHAN
%20STEEL%20LIMITED.-08022013.pdf)

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 7

 Exhibit 2. Financial statements of Bhushan Steel Limited

Table EII Profit and loss account

Bhushan Steel Limited
Consolidated Profit and loss account Rs. Cr. (1 cr = 10 million)
03/08 03/09 03/10 03/11 03/12 03/13
For the year ending 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths

Income
Revenue from operations [Gross] 4,672.73 5,413.32 5,995.09 7,334.60 10,474 11,336
Less: Excise/service tax/other levies 492.5 423.83 381.3 575.82 851 1,056
Revenue from operations [Net] 4,180.23 4,989.49 5,613.79 6,758.79 9,623 10,281
Other operating revenues 0 0 0 244.75 338 464
Total operating revenues 4,180.23 4,989.49 5,613.79 7,003.54 9,961 10,744
Other income 22.81 178.62 115.71 69.36 24 17
Total revenue 4,203.04 4,810.87 5,729.50 7,072.89 9,985 10,762
Expenses
Cost of materials consumed 3,420.05 3,574.77 4,261.34 4,238.26 5,507 5,799
Purchase of stock-in-trade 0 6.21 6.42 2.49 – 81
Operating and direct expenses 12.88 13.2 13.05 0 48 106
Changes in inventories of FG, WIP and stock-in trade 188.07 98.17 308.25 476.74
Employee benefit expenses 73.95 101.19 142.18 123.75 144 173
Finance costs 58.51 58.34 138.46 447.71 1,046 1,287
Depreciation and amortisation expenses 211.41 234.41 209.14 277.86 620 831
Other expenses 75.31 160.35 118.66 1,083.86 1,360 1,486
Less: Inter unit / segment / division transfer
Less: Amounts transfer to capital accounts
Total expenses 3,664.07 4,246.64 4,581.00 5,697.19 8,630 9,552
Profit/loss before exceptional, extraordinary items and tax 538.97 564.23 1,148.50 1,375.70 1,355 1,209
Exceptional items 0 0 0 0 – –
Profit/loss before tax 538.97 564.23 1,148.50 1,375.70 1,355 1,209
Tax expenses-continued operations
Current tax 40.8 88.4 222.35 274.21 273 243
Less: MAT credit entitlement 0 0 0 272.42 272 242
Deferred tax 73.25 49.58 83.22 368.78 341 304
Other direct taxes 1.15 1.5 0 0
Tax for earlier years 0 0 0 0 – –
Total tax expenses 115.2 139.48 305.57 370.57 342 305
Profit/loss after tax and before extraordinary items 423.77 424.75 842.94 1,005.13 1,013 904
Prior period items 0 0 0 0
Profit/loss from continuing operations 423.77 424.75 842.94 1,005.13 1,013 904
Profit/loss for the period 423.77 424.75 842.94 1,005.13 1,013 904
Minority interest 0 0 0.01 0.04 2 2
Share of profit/loss of associates 0 0 0.25 2.3 0 0
Consolidated profit/loss after MI and associates 423.77 424.75 843.18 1,007.39 1,015 907
Other additional information
Earnings per share
Basic EPS (Rs) 100 100 199 47 47 42
Diluted EPS (Rs) 100 100 199 47 47 42
Value of imported and indigenious raw materials
Imported raw materials 0 0 0 0 – –
Indigenous raw materials 0 0 0 0 – –
Stores, spares and loose tools
Imported stores and spares 0 0 0 0 – –
Indigenous stores and spares 0 0 0 0 – –
Dividend and dividend percentage
Equity share dividend 10.62 10.62 10.62 10.62 18.12 20.28
Tax on dividend 0 0 0.23 3.7 2.95 3.4
Equity dividend rate (%) 1.8 1.8 1.8 2.32
Notes: Other expenses include primarily power and fuel expenses, administrative expenses and selling and distribution expenses

PAGE 8 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Table EIII Balance sheet
Bhushan Steel Limited
Consolidated balance sheet Rs. Cr. (1 cr = 10 million)
03/08 03/09 03/10 03/11 03/12 03/13
As on 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths

Equities and liabilities

Shareholder’s funds
Equity share capital 42 42 42 42 42 44
Preference share capital – – 37 69 86 102
Total share capital 42 42 79 111 128 145
Reserves and surplus 1,583 1,986 3,913 5,785 7,444 8,903
Total reserves and surplus 1,583 1,986 3,913 5,785 7,444 8,903
Money received against share warrants
Total shareholders’ funds 1,625 2,028 3,992 5,896 7,573 9,048
Minority interest 89
Non-current liabilities
Long-term borrowings 4,617 7,597 10,870 10,969 15,529 21,664
Deferred tax liabilities [Net] 199 249 334 698 1,039 1,343
Other long-term liabilities – – – 648 1,506 2,179
Long-term provisions – –
Total non-current liabilities 4,815 7,846 11,204 12,315 18,074 25,186
Current liabilities
Short-term borrowings 1,101 469 534 4,474 4,288 5,233
Trade payables 1,050 863 979 992 997 1,617
Other current liabilities 194 505 589 1,529 2,266 2,101
Short-term provisions 19 28 36 48 55 76
Total current liabilities 2,365 1,866 2,138 7,043 7,606 9,027
Total capital and liabilities 8,806 12,140 17,333 25,255 33,724 43,262
Assets
Non-current assets
Tangible assets 1,744 1,871 2,075 12,566 15,733 18,142
Intangible assets 15 15 4 1 1 1
Capital work-in-progress 4,568 7,400 11,109 5,325 9,217 12,595
Intangible assets under development
Fixed assets 6,327 9,286 13,189 17,891 24,951 30,738
Non-current investments 58 108 370 154 348 402
Deferred tax assets [Net] 2 3 4 – 2,852 2,496
Long-term loans and advances – – – 2,854 19 21
Other non-current assets – – – 0
Total non-current assets 6,387 9,397 13,563 20,900 28,171 33,658
Current assets
Current investments – – – 25 25 25
Inventories 1,130 1,230 1,963 3,168 3,311 5,560
Trade receivables 617 620 734 484 1,220 2,343
Cash and cash equivalents 28 124 120 35 372 154
Short-term loans and advances 644 769 953 644 624 1,523
Other current assets – –
Total current assets 2,418 2,744 3,770 4,355 5,553 9,604
Total assets 8,806 12,140 17,333 25,255 33,724 43,262
Other additional information
Contingent liabilities, commitments
Contingent liabilities 2,546 2,424 4,047 6,931 6,900 4,543
CIF value of imports
Raw materials 1,181 1,332 2,039 1,539 1,679
Stores, spares and loose tools – – – 109 –
Trade/other goods 122
Capital goods 447 1,281 584 786 1,243
Expenditure in foreign exchange
(continued)

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 9

 Table EIII
Bhushan Steel Limited
Consolidated balance sheet Rs. Cr. (1 cr = 10 million)
03/08 03/09 03/10 03/11 03/12 03/13
As on 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths

Expenditure in foreign currency 158 345 160 255 399

Remittances in foreign currencies for dividends
Dividend remittance in foreign currency 0 0 0 80 –
Earnings in foreign exchange
FOB value of goods 1,258 1,463 1,217 1,206 1,813
Other earnings 2 0 4 0 0
Bonus details
Bonus equity share capital
Non-current investments
Non-current investments quoted market value 1 1 152 1 2 0
Non-current investments unquoted book value 53 59 164 153 346 402
Current investments
Current investments quoted market value – – – – 1 –
Current investments unquoted book value – – – 25 25 25
Face value per share 1 1 1 1 1 1
Reserves reconciliation 1,170 11 1,095 880 754 486
Balance sheet reconciliation 0 400 – 0 383 –

Table EIV Cash flow statement

Bhushan Steel Limited
Cash flow Rs. Cr. (1 cr = 10 million)
03/08 03/09 03/10 03/11 03/12 03/13
For the year ending 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths

Net profit/loss before extraordinary items and tax 539 564 1,149 1,376 1,355 1,209
Taxes 115 139 306 371 342 305
Extraordinary activities 0 0 0 0 0 0
Depreciation 211 234 209 278 620 831
Change in working capital (excl cash) 2,391 229 1,031 670 861 4,269
Minority interest and share of associates 0 0 0 2 2 3
Dividends 11 11 11 14 21 24
Net cashflow from operating activities -1,766 420 10 601 753 -2,555
Change in fixed assets, investments and other assets 6,599 3,244 4,375 7,615 7,891 6,318
Net cash used in investing activities -6,599 -3,244 -4,375 -7,615 -7,891 -6,318
change in current liab 2,365 499 272 4,906 562 1,421
Change in long-term liab 4,815 3,031 3,358 1,112 5,758 7,113
Change in equity 42 0 37 32 17 17
Net cash used from financing activities 7,223 2,531 3,666 6,049 6,338 8,551
Reconciliation between reserves and P&L 1,170 11 1,095 880 754 486
Reconciliation between B/S Assets and liabilities 0 400 0 0 383 0
Net Inc/Dec in cash and cash equivalents 28 97 396 -85 338 164
Cash and cash equivalents begin of year 28 124 120 35 372
Cash and cash equivalents end of year 28 124 120 35 372 154

PAGE 10 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Table EV Financial ratios
Bhushan Steel Limited
Financial ratios
03/08 03/09 03/10 03/11 03/12 03/13

Efficiency
Total asset turnover
Sales/ total assets 0.65 0.53 0.41 0.34 0.35 0.32
Fixed asset turnover
Sales/ fixed assets 1.73 1.82 1.49 1.61 1.79 1.12
Current asset turnover
Sales/ current assets 0.47 0.41 0.32 0.28 0.30 0.25
Inventory turnover (No. of days)
Inventory/ cost of goods sold  365 121 114 169 233 174 273
Debtors turnover (No. of days)
Debtors/ credit sales  365 54 45 48 25 45 80
Creditors turnover (No. of days)
Creditors/ raw materials on credit  365 110 84 81 68 53 80
Profitability
Operating margin
Operating profit/ sales 14% 12% 23% 26% 24% 23%
Net profit margin
Net profit/ sales 10% 9% 15% 14% 10% 8%
ROA
PBIT/ assets 7% 5% 7% 7% 7% 6%
ROE
PAT/ net worth 26% 21% 21% 17% 13% 10%
Earnings per share (EPS)
PAT/ equity share capital  face value per share 9.98 10.00 19.85 23.67 23.85 20.60
Liquidity
Current ratio
Current assets/ current liabilities 1.02 1.47 1.76 0.62 0.73 1.06
Quick ratio
Current assets - inventory/ current liabilities 0.54 0.81 0.85 0.17 0.29 0.45
Solvency
Debt/ Equity Ratio
Debt/ equity 4.42 4.79 3.34 3.28 3.39 3.78
Interest Cover
PBIT/ interest 10.21 10.67 9.29 4.07 2.29 1.94
DSCR
(PAT + Interest + Deprn)/ (LT Loan Instalment + Interest) 0.93 0.61 0.68 0.78 0.74 0.62
Debt/ EBITDA
Total debt/ EBITDA 8.88 11.33 8.92 9.21 8.50 10.28
Market Valuation
Price Earnings Ratio (P/E)
Market price per share/ earnings per share 14.93 13.20 14.61 18.21 19.20 22.47
Price to Book Ratio (P/B)
Market price per share/ book value per share 0.39 0.28 0.31 0.31 0.26 0.22
Market Price (1st July of the Year) 149 132 290 431 458 463

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 11

 Table EVI Financial performance – peer group comparison
Company name 2015 2014 2013 2012 2011

D/E
Bhushan Steel Ltd. 5.69 4.56 3.68 3.35 3.27
Essar Steel India Ltd. 6.08 10.77 12.49 5.05 3.55
J S W Steel Ltd. 2.84 2.66 2.30 2.20 1.76
Jindal Steel & Power Ltd. 2.55 1.92 1.63 1.45 1.52
Monnet Ispat & Energy Ltd. 6.72 4.02 3.33 2.50 1.67
Steel Authority Of India Ltd. 1.42 1.17 1.08 0.95 1.09
Tata Steel Ltd. 3.60 2.93 2.92 2.26 2.78
Intt cover
Bhushan Steel Ltd. 0.50 1.05 1.93 2.15 4.07
Essar Steel India Ltd. 1.17 0.74 20.00 0.21 0.38
J S W Steel Ltd. 1.63 1.26 1.86 1.89 3.30
Jindal Steel & Power Ltd. 0.54 2.30 3.06 6.56 10.97
Monnet Ispat & Energy Ltd. 20.00 1.26 3.33 4.40 8.48
Steel Authority Of India Ltd. 2.43 3.82 4.22 4.41 13.90
Tata Steel Ltd. 0.74 2.55 20.00 3.00 4.06
5.71 4.58 3.78 3.39 3.28
0.50 1.06 1.94 2.29 4.07
P&L
Bhushan Steel Ltd. 12,571 583 9,043 10,129 10,051
Essar Steel India Ltd. 4,751 8,048 49,801 20,919 7,591
J S W Steel Ltd. 17,197 3,880 11,541 14,932 16,594
Jindal Steel & Power Ltd. 14,546 18,938 29,116 40,023 38,040
Monnet Ispat & Energy Ltd. 8,693 373 2,235 2,633 2,775
Steel Authority Of India Ltd. 19,389 26,523 23,291 35,934 50,140
Tata Steel Ltd. 39,555 36,640 73,624 49,485 88,561

Exhibit 3. Industry overview

The steel industry may be divided into primary & secondary sectors.
The primary sector products are mainly billets, pellets, rounds and hot rolled coils/plates
(HRC/HRP).These form the key raw materials for the secondary steel sector.
The secondary steel includes value-added items such as Angles, Channels, Wire Rods,
Cold Rolled Coils/sheets (CRC/CRS) and Galvanised Coils/Sheets. CR Sheet is a thinner
sheet used for consumer durables like refrigerators, washing machines, automobiles,
bicycles, etc. CR sheets are used by the automobile and domestic appliances industry
whereas CR strips are used in manufacturing of bicycles, drums, barrels, fabrication,
furniture, etc. CR Coils are mainly used for manufacturing GP/GC sheets.
India imported about 20 per cent of its domestic steel consumption in 2015. The imports
were mainly from China, but also from other countries like Japan and South Korea.

SWOT analysis of Indian steel sector

Strengths

䊏 Adequate availability of iron ore from the mining companies in India – This helps in cost-
competitiveness of the steel companies.
Weaknesses
䊏 Inadequate availability of coking coal from Indian mines – While a few companies like
Tata Steel have their own coal mines, most steel companies in India import coal.
䊏 High cost of capital and energy – The manufacturing of steel is a capital and energy
intensive business. The high cost of capital and inadequate availability of sustained
power supply at a low cost makes it difficult for Indian companies to be globally

PAGE 12 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

 competitive. The nominal interest rate for an AAA (domestic rating) company on an
Indian rupee bond issuance is usually upward of 9 per cent per annum. The cost of
purchased power for the steel companies has traditionally been upward of 8 cents per
unit.
Opportunities
䊏 Growing market – The domestic steel market in India has been growing on the back of
growing end user industries like automotive, housing, and infrastructure.The domestic
steel consumption grew at the rate of 7 per cent per annum (by volume) over 10 years
since 2008.
䊏 Potential for increase in consumption – The per capita annual domestic consumption of
steel in India, as of 2018, is 80 kg against the global average of 250 kg.
Threats
䊏 Commodity business – Most of the primary steel producers face intense international
competition from large producing countries like China. These companies do not have
any pricing power, as steel is a commodity which can be easily imported from other
countries; and
䊏 Changes in international trade dynamics – Any significant change in the international
political or economic climate affects the steel industry directly through changes in tariffs
and indirectly through changes in growth and employment indicators.

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 13

 Exhibit 4. Risk factors disclosed by company since 2012

Table EVII Excerpts from the annual reports of Bhushan Steel Limited for the years 2016-2017 and 2011-2012
Risk factors Risk mitigants (in 2017) Risk mitigants (in 2012)

Raw material availability The Company’s steel manufacturing capacity at Odisha is located in a With the rising cost of raw
region with rich availability of staple raw material i.e. iron ore, coal and material such as iron ore,
also has close proximity to ports for importing raw material. Iron ore is access to captive raw materials
presently being bought by the Company from suppliers located in Barbil, has become critical for steel
Odisha such as Orissa Mining Corporation, Rungta, Essel Mining, etc. manufacturers but fall in other
Coking coal is being imported from BHP Billiton, Australia. The Company critical inputs and coking coal
currently procures thermal coal through linkages to Mahanadi Coal has helped the company to
Fields and daily e-auctions organised by Coal India Limited and its keep its overall input cost at
subsidiaries reasonable level.
The major raw materials
required for the project are iron
ore/ coke/ coking coal and
thermal coal. The plant is
located in an area where iron
ore fines are easily available at
reasonable rates from various
private mine owners.
The company currently
procures thermal coal through
linkages and daily “e-auctions”
organised by Coal India Limited
and its subsidiaries. The
company also imports coal from
Australia and South Africa.
The coal mine at New
Patrapada has approximately
325 million tonnes of reserves.
The mine is expected to be
operational in next 2-3 years.
The company has also acquired
sizeable stake in Bowen Energy
Lts, Australia, which has the
license for exploring coking coal
mines in Queensland, Australia.
Thus, going forward, the
company shall use its own
coaking coal and iron ore for
captive consumption and
mitigate the input risk
Power availability Steel manufacturing process is power intensive and uninterrupted
supply is necessary for its viability. BSL has a 110 MW captive power
plant in Odisha, 24 MW at Sahibabad and another 24 MW at Khopoli.
BSL is in the process of expanding its capacity from 110 MW to 307 MW
at Odisha. In addition to above there is additional power generation
capacity of 485 MW in Bhushan Energy and associate Company
Technology risk To ensure high operational profitability, manufacturing facilities of BSL
are updated with latest available technology and major equipments are
(continued)

PAGE 14 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Table EVII
Risk factors Risk mitigants (in 2017) Risk mitigants (in 2012)

procured from established and reputed manufacturers like Siemens,

SMS Siemag, Paul Wurth, L&T, etc. to minimise the performance risk
Offtake risk With its wide range of value-added products, strong customer
relationships with OEMs and distribution network, BSL has leveraged its
position as one of the major suppliers of flat steel products and also
caters to the export market.
BSL downstream facilities at Sahibabad and Khopoli are strategically
located near to major white good markets i.e. Delhi/NCR and Pune
respectively.
These are the major hubs where majority of the automobile and
consumer durable companies are located. BSL has its plants
strategically located at Meramandali and Khopoli which are located near
to the major international seaports such as Paradeep and Nhava Sheva
JNPT port respectively. The plant at Khopoli, due to its proximity to west
coast of India through JawaharLal Nehru Port enables the Company to
capture the export market in African / Middle East countries. Similarly,
the plant at Meramandali is located close to the East coast of India and
enables the Company to capture South-East Asian and Australian
markets. This enables BSL to send its product to the international
markets with minimal inland transportation which reduces the overall
freight charges and shipment time. Also, BSL has been a long term
supplier to major renowned white goods manufacturers such as Maruti
Suzuki, Tata Motors, Honda Cars, Mahindra & Mahindra, Ashok Leyland
are few of the examples amongst Automobile sector. LG, Samsung,
Videocon, Haier are the other renowned names in the consumer durable
sector
Source: Bhushan Steel Annual Reports for 2011-2012 and 2016-2017

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 15

 Exhibit 5

Table EVIII Peer group – comparison of financials

Company name 2015 2014 2013 2012 2011

Net profit (Rs million)

Bhushan Steel Ltd. 12,571 583 9,043 10,129 10,051
Essar Steel India Ltd. 4,751 8,048 49,801 20,919 7,591
J S W Steel Ltd. 17,197 3,880 11,541 14,932 16,594
Jindal Steel & Power Ltd. 14,546 18,938 29,116 40,023 38,040
Monnet Ispat & Energy Ltd. 8,693 373 2,235 2,633 2,775
Steel Authority Of India Ltd. 19,389 26,523 23,291 35,934 50,140
Tata Steel Ltd. 39,555 36,640 73,624 49,485 88,561
Debt/equity ratio
Bhushan Steel Ltd. 5.71 4.58 3.78 3.39 3.28
Essar Steel India Ltd. 6.08 10.77 12.49 5.05 3.55
J S W Steel Ltd. 2.84 2.66 2.30 2.20 1.76
Jindal Steel & Power Ltd. 2.55 1.92 1.63 1.45 1.52
Monnet Ispat & Energy Ltd. 6.72 4.02 3.33 2.50 1.67
Steel Authority Of India Ltd. 1.42 1.17 1.08 0.95 1.09
Tata Steel Ltd. 3.60 2.93 2.92 2.26 2.78
Earnings before interest and tax/interest expense
Bhushan Steel Ltd. 0.50 1.06 1.94 2.29 4.07
Essar Steel India Ltd. 1.17 0.74 20.00 0.21 0.38
J S W Steel Ltd. 1.63 1.26 1.86 1.89 3.30
Jindal Steel & Power Ltd. 0.54 2.30 3.06 6.56 10.97
Monnet Ispat & Energy Ltd. 20.00 1.26 3.33 4.40 8.48
Steel Authority Of India Ltd. 2.43 3.82 4.22 4.41 13.90
Tata Steel Ltd. 0.74 2.55 20.00 3.00 4.06
Source: CMIE Prowess

Exhibit 6. Tata Steel – a company in contrast

Tata Steel is the largest producer of steel in India, with a capacity of 26 million tonnes (as of
2015). It has steel making capacities in India, UK, Singapore, Thailand and Vietnam. It is
also the oldest Indian company in the steel sector and is a part of the Tata Group, known for
a high level of business ethics.
As the global steel industry was going through turmoil after 2012, Tata Steel was also
affected. The company had expanded aggressively in the previous decade by acquiring
stakes in several steel making companies across the globe. In 2007, Tata Steel had bought
a much larger company, Europe’s second largest steel producer, Corus, for $8.1bn. The
combination of Corus (18.18MT pa) and Tata (4.4MT pa) would create the fifth largest
steelmaking company worldwide. However, as a result of the global financial crisis, followed
by a slowdown in demand for steel after 2011, the revenues of Tata Steel were also
affected. This, along with an increased leverage, led to financial losses from the year 2013
onwards.
The company, however, recognised the problem early on and began on a path of correction
in its leverage. It took the following steps by 2015, and communicated the same to its
investors as well:
䊏 maximising use of internal accruals to fund growth capex;
䊏 diversifying sources of capital – Debut US$bond issuance of US$1.5bn;
䊏 lengthening the debt maturity profile by over 5 years;
䊏 convenant light financing; and
䊏 monetisation of non-core assets – Rs.29bn in FY15.

PAGE 16 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

As a result of the swift actions taken by the company, it moved back into profits by the year
2017. The company has always been known for having a highly capable and professional
management. The Board and the Management of the company displayed strategic depth
and strong decision-making capabilities. The support from the strong and diversified Tata
group also helped the company ride over the phase of slowdown.

About the author

Hemant Manuj has worked with several Indian banks and financial institutions for twenty five
years. He is currently teaching and researching in the areas of banking, risk management
and financial markets. Hemant Manuj can be contacted at: [email protected]

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 17