Corporate Development

Published: Feb 28, 2022
Updated: Feb 28, 2022

Neelachal Ispat deal - Win-win for Tatas and MMTC

Over a period of time, the Tatas will certainly start reaping the fruits of their recently acquired CPSEs-owned Neelachal Ispat Nigam (NINL). Nevertheless, the immediate, instant and positive effect will undoubtedly accrue to the government-owned, 58-year-old publicly listed MMTC, which is the biggest beneficiary of the deal.

NINL is a joint venture of 4 CPSEs, namely MMTC (49.78%), NMDC (10.10%), BHEL (0.68%) and MECON (0.68%), whereas the balance equity capital is held by the state PSUs of the Odisha government, OMC and IPICOL. NINL has an integrated steel plant with a capacity of 1.1 mmtpa at Kalinganagar, Odisha. Its major product portfolio includes pig iron and LAM coke along with nut coke, coke breeze, crude tar, ammonium sulphate and granulated slag. In the second phase, the company plans to manufacture billets, bars and wire rods of different grades and sizes. NINL has been running into huge losses and the plant has been closed since end-March 2020. The company has huge debt and liabilities exceeding Rs 6,600 crore as of March 2021, including overdues of promoters at Rs 4,116 crore, banks at Rs 1,741 crore and the balance Rs 743 crore attributed to creditors and employees. The company has a negative net worth of Rs 3,487 crore and accumulated losses of Rs 4,228 crore as per the last balance sheet.

BURDEN OFF MMTC

Being a lead promoter of NINL, MMTC has invested Rs 459.11 crore towards its 49.78% equity stake in the company. In addition, it has given loans and advances of Rs 3,294.13 crore as well as a corporate guarantee of Rs 1,345.82 crore on behalf of NINL. In fact, MMTC has had poor credit ratings and suffered because of its exposure to NINL. However, the situation will now will turn extremely positive as the company will get its money back, including equity capital, and will also be relieved from the contingent liability of its corporate guarantee.

The strategic sale of NINL will improve MMTC’s cash flow sizeably and it will become debt-free as it had short-term debt of only Rs 2,418 crore as of March 2021. Needless to say, its credit profile will also improve considerably. Importantly, the company will be able to pursue its growth plans more aggressively. The government owns 89.93% stake in the company, LIC 2.46% and the balance 7.61% is spread among 1,79,384 public shareholders. At its current market price of Rs 47.45 per share (Re 1 face value), the company is valued at Rs 7,117.50 crore. The equity capital is Rs 150 crore and negative reserves are Rs 50.26 crore as of March 2021.

NINL has its own gas-based 62.5 MW captive power plant and is also exporting a substantial quantity of surplus power. It also has its own captive iron ore mines with huge reserves of 100 mmt which are under development. Another big advantage the Tatas will have is NINL’s 2,500 acres of land. They have already announced their expansion plan for a 4.5 mmtpa state-of-the-art complex to produce long products within the next few years and eventually to expand the capacity further to 10 mmtpa by 2030.

This will be a game changer for the Tatas in strengthening their long products manufacturing capacity in a big way. NINL has been acquired by Tata Steel Long Products (TSLP) – a publicly listed company wherein Tata Steel owns 74.91% as its promoter. At its current market price of Rs 710 per share, TSLP is valued at Rs 3,202 crore.

EV OF Rs 12,100 Cr

TSPL’s bid has been accepted with an enterprise value of Rs 12,100 crore for acquiring a 93.71% stake of the joint venture promoter group and at a reserve price of Rs 5,616.97 crore. A part of the sale proceeds would be infused in the company to the extent of the liabilities which will be set off and the balance amount in the escrow account of the selling shareholders in proportion to their shareholding. The transaction is likely to be completed within two months.

It is a win-win for both TSLP and MMTC. This is the first instance of privatization of a public sector steel manufacturing enterprise in India. Restarting of the plant will also help in reviving and growing the eco-social development of the region.