Acquisitions in Steel Unwarranted: SBI Group Chief Economic Advisor

At a time when investors are lining to acquire particularly the stressed steel assets, the economic research department of the country’s largest public sector lender says that the Indian steel industry needs to enhance its capacity utilization and optimize product mix in the current phase, but it should not go for inorganic growth.

“One aspect is clear that no acquisitions are warranted in the current situation. Utilising capacities and optimal product mix remain the key assessing factors as of now,” said SBI Group Chief Economic Advisor Soumya Kanti Ghosh said in a report.

Stating that the Indian steel industry is now more dependent on the government policy based on anti-dumping duties and rationalisation of import duties, he emphasized the need for improving domestic demand and said that government spending in affordable housing, roads and defence are some of the key growth areas that may be targeted in future.

Government has also made it mandatory for India-made steel use in state-funded projects. Since the sector is a net forex spender, it also needs to focus on import substitution products. Ghosh also said that some of the integrated steel sector may undergo consolidation and revive hopes when demand for steel inches up, though admits that not all large integrated steel entities have fared bad in FY’2017.

Even in current fiscal FY’2018, the topline and mid-line numbers for some integrated players are likely to pose better numbers.

“The key factors that led to stress in steel sector in the past have largely been ambitious overseas acquisitions, capacity expansions and the subsequent fall in exports due to protection measures initiated by various countries primarily resulting in capacity overhang. Since the sector is employment intensive, the socio economic impact is wide and hence led to protectionist measures,” Ghosh said.

Sources said JSW Steel, Tata Steel, ArcelorMittal, Vedanta and Posco are looking to acquire assets on which the National Company Law tribunal (NCLT) has initiated insolvency proceedings. These assets are Essar Steel, Bhushan Power and Bhushan Steel among others.