By Steel 360 Bureau
At the end of July 2019, Neelachal Ispat Nigam Ltd (NINL), one of the 200-odd loss-accumulating state-level central public sector enterprises (CPSEs) across the country, was forced to bite the bullet. Grappling with indifferent promoters and dwindling cash flows, NINL covertly went for a shutdown of its blast furnace operations at its 1.1-million tonne per annum (MTPA) steel-making facility at Duburi within Odisha’s Kalinga Nagar Industrial Complex (KNIC). The complex, touted as India’s steel hub, is home to a cluster of steel units owned by Tatas, Jindals and other small-to-mid-tier manufacturers and is projected to contribute a fifth of the country’s envisaged crude steel capacity of 300 million tonnes (MnT) by 2030.
That NINL would temporarily suspend its operations was not surprising. The market was already abuzz with rumours of the steel PSU shutting shop. The central government-owned MMTC Ltd, which owns 49.9% stake in NINL, informed the Bombay Stock Exchange (BSE) on July 27, 2019 that it was contemplating plans to sell its shares. Ever since that stock market announcement, NINL insiders say MMTC had stopped buy and sale transactions for the ailing steel unit.
As per an agreement, MMTC used to source iron ore from the open market to feed the NINL blast furnace. Moreover, sales of finished steel products made at the NINL steel factory were canalised through MMTC. In lieu of all buying and selling transactions, MMTC, the trading company, levied a commission of 3%. Once MMTC had decided to divest its shares in NINL, it also clogged the cash flow, vital to sustain NINL’s day-to-day operations and to provide for salaries and allowances of its employees.
NINL’s case was more poignant since the other two key promoters – the state government-owned enterprises – Odisha Mining Corporation (OMC) and the Industrial Promotion & Investment Corporation of Odisha Ltd (Ipicol), which, between them, hold 26% equity, did not help with cash either. Like OMC and Ipicol, central PSEs NMDC, BHEL and Mecon Ltd, which are minority stakeholders, also remained mute observers as NINL sunk deeper into crisis.
Pig Iron, Billets Markets Spooked
Historically, NINL has been the biggest producer-cum-exporter of pig iron. Its pig iron production and supplies significantly swayed market prices. Since 2004-05, NINL has been enjoying hegemonic status in terms of production and exports of pig iron. Pig iron and low ash metallurgical (LAM) coke produced by NINL have gained wide currency, both in domestic and international markets.
After the successful completion of its blast furnace capital repair work in May 2018, NINL had ramped up production of both pig iron and hot metal. In June 2019, NINL’s monthly output of pig iron and hot metal had peaked at 46,385 tonnes and 53,300 tonnes respectively.
As NINL was accelerating its production, the pig iron market was lulled by flagging demand from foundries and escalating costs of raw materials like iron ore. Taking cues from the market, NINL had to slow down its pig iron production tempo. Despite steep input costs, major pig iron ore producers like NINL were constrained to pass on the hike in costs to consumers. As of now, domestic demand of pig iron is muted because of depleting automobile sales and prevailing liquidity issues.
And, with exports softening, more producers are diverting their products into the domestic market, spawning a glut. Tata Metaliks admitted in a statement that despite its highest-ever first quarter (Q1) sales, the pig iron business was a drag on the company’s profitability.
However, the temporary closure of NINL’s plant could change equations and strengthen pig iron prices. Since no guesstimate looks credible now on NINL’s revival, peers like Vedanta-owned Sesa Goa could profit from the supply crunch of pig iron. Of late, NINL had also resumed steel billets production and had launched company-branded TMT bars. Both were finished products – a departure from the regular intermediate products which NINL had been churning out.
NINL’s operations have been a testament to its chequered past. The public sector steel maker has weathered a few hostile takeover storms by peers bigger in volume and endowed with financial muscle.
Steel Authority of India Ltd’s (SAIL’s) bid to acquire stake in NINL dates back to July 2005 when a Committee of Secretaries (CoS) had recommended the merger of NINL with SAIL as per a proposal by the Ministry of Steel. Alternatively, the ministry had suggested inducting another PSU, Rashtriya Ispat Nigam Ltd (RINL), as a strategic investor in NINL. In May 2009, the ministry had revised its proposal, suggesting that RINL should purchase 51% equity in NINL from MMTC and other PSUs. But, the proposed merger of NINL with RINL fell through as MMTC failed to get a fair value for its share.
NINL’s financials at a Glance
|Loss after tax||
Source: NINL annual reports.
In February 2014, the steel ministry had revived its proposal for SAIL’s acquisition of a majority stake in NINL, stating that SAIL was best suited to utilise the existing facilities at NINL and would help it to achieve its full potential. But, the Department of Disinvestment opposed the proposal, saying any move to coercively take away the shares of MMTC held in NINL is unjustified and is also not legally tenable according to the Company Law. Later, in January 2016, a decision was taken to form a committee to review the present status of NINL and come up with suitable recommendations. In June 2016, a draft report on restructuring of NINL was sent to the Ministry of Steel, soliciting its comments.
Of late, the talk of merger of RINL with the besieged NINL has gained ground with Dharmendra Pradhan being appointed the Steel Minister in the Modi government’s second term in office.
|Shareholding in NINL|
|Bhel, Mecon, others||10.9|
Source: Steel 360 Research
Odisha Govt’s Flip-flop On NINL
Back in August 2017, when the NINL plant was hobbling in its bid to expand, owing to lack of capital infusion by MMTC, Odisha’s Chief Minister Naveen Patnaik had stepped in. Sensing that NINL’s operations may be jeopardised for want of funds, Patnaik had escalated the matter to the Union government. He wrote to Nirmala Sitharaman, the then Minister for Industries and Commerce, underscoring the need for capital infusion of INR 300 crore by the promoters to help NINL wriggle out of an inevitable financial morass.
Much depended on MMTC’s funding support since it was the largest stakeholder in the venture. MMTC had engaged consultancy firm Mecon to prepare a techno-feasibility report on NINL’s turnaround. But the report was kept under wraps for long and MMTC dithered on committing capital to the NINL plant. Later, when a top-level MMTC delegation, including Chairman Ved Prakash, Vice-Chairman S.S. Mohanty and two directors called on the Odisha chief minister in January 2018, the latter assured full support for its sustainable operations and growth.
As time rolled on and NINL continued to be in the red, both the Odisha government-controlled entities – OMC and Ipicol – have thought it expedient to exit the steel venture. This is more so after MMTC’s open announcement to offload stake. “Over the past few years, NINL’s financial performance has been underwhelming. We have minority equity participation in the company and don’t have much say in its management. We don’t feel it’s prudent to stay invested in NINL although a decision is not firmed up yet. MMTC being the largest stakeholder should take the call. The revival of NINL needs sizeable investments and given its stressed finances, the steel PSU is constrained to work on its own,” said a state government official.
NINL Turnaround: Future Tense?
Even without tangible support from the promoters, NINL has been working on the revival, on its own. Riding on its blast furnace capital repair work and recommencement of steel billets production, NINL turned EBITDA (earnings before interest, taxes, depreciation and amortisation)-positive during the first half of financial year 2018-19 (FY19). In this financial year, NINL was hoping to accomplish net profit, targeting an EBITDA of INR 400 crore.
NINL’s optimism sprang from the sound market response to its steel billets and TMT bars. NINL had lined up 20 new products for FY20 to shore up its margins and take the company back into the black. The new products in the offing include structural, rounds, flats, beams, angle channels and round cornered squares. That apart, NINL was also hopeful of commencing mining from its captive mine at Roida with a repository of 110 MnT of iron ore.
Unfortunately, NINL’s road to profitability is still beset with hurdles. Promoters not sinking in their share of capital have piled up agonies for the PSU. The roadmap to revival is still fraught with uncertainty for state-level public enterprises (SLPEs) like NINL. The plan to get the SLPEs back into the black is left to the central ministries under whose administrative control the enterprises fall.
For the past five years, NINL has been bleeding, piling up losses largely due to lack of capital infusion by the promoters. Also, being a leveraged company, a sizeable chunk of its earnings goes into servicing loans.
The Central government recently kindled a glimmer of hope for NINL’s revival. The Ministry of Disinvestment & Public Asset Management (DIPAM) has asked the Odisha government for its concurrence in the Centre’s divestment plan. A high-powered committee of the Ministry of Commerce & Industry has already recommended strategic divestment of MMTC’s equity in NINL to tap the full potential of the steel company. Till the divestment plan reaches fruition, the NINL collective remains tense.