Thursday, September 06, 2012

L. N. Mittal and his siblings have been dramatically different

Post the split of the business, the destinies of L. N. Mittal and his siblings have been dramatically different. But one can also find them converging on some fronts now

The tendency to live dangerously does have repercussions, for the one problem both companies have to naturally face with is debt. Arcelor Mittal itself had a debt of $18.8 billion by the end of 2009, an improvement from the high of $32.5 billion by September 2008. You wouldn’t consider that a problem in the case of Arcelor Mittal, but for the fact that the company is equally susceptible to swings in the steel sector. Last year, the company posted net income of only around $75 million compared to $10.49 billion the previous year. The reason was the decline in demand and average steel prices as reflected by the global recession. That is precisely why not having production capacity in a growing market like India pinches L. N. Mittal now like never before.

As far as Ispat is concerned, profitability has been hard to come by, despite the fact that it is present in the booming Indian market. The company recorded Rs.83.63 billion in gross income in FY 2009-10 (a drop by 8.4% yoy). Losses for the year were at Rs.2.53 billion compared to Rs.6.9 billion the previous year. Moreover, its D/E ratio is rather high at 4.1 at the end of the year. By June 2010, its debt was at Rs.71.86 billion. Recently, rumours were rife that the company’s lenders are planning to sell out stake to other companies, which Ispat has denied in a letter to B&E. Ispat’s problems have actually been compounded by the lack of captive iron ore and coking coal. A steel analyst on condition of anonymity told B&E, “Due to the high cost of raw material and debt pressure, the company continues to suffer. They need a sustained steel cycle for some time to be able to get out of that situation.” Moreover, they realize the need to convert debt to equity, which is where the 10% stake sale to Stemcor for Rs.65 billion has come in quite handy. On the raw material front, an Ispat spokesperson tells B&E, “Ispat constantly seeks to ensure security of raw materials, achieve reduction in costs of inputs, improve process efficiencies, rationalize production capabilities and enhance plant performance. Initiatives include commissioning of 110 MW power plant at Dolvi, coke oven plant with annual capacity of 1.0 MTPA and Iron ore pellet plant (capacity of 2.0 MTPA) at Dolvi and Damkodwadvi in Maharashtra.” In addition, the top line has been stagnating for the past few years and must be addressed urgently as well.

While Arcelor Mittal needs to consolidate its operations and make headway into the Indian market, the imperative for Ispat is to ensure backward integration and improved efficiency. Both have to look at their leverage carefully before taking up more aggressive expansions. Interestingly, it seems that their destinies seem to be converging in this sense, an event that has been rather unprecedented since 1994.


Source : IIPM Editorial, 2012.
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