Davos 2019: Why JSW’s Sajjan Jindal Wants The Ruias To Get Essar Steel Back

JSW Steel’s Sajjan Jindal throws his weight behind the Ruias in Essar Steel saga.

Sajjan Jindal, Chairman and Managing Director of JSW Steel. (Photograph Source: JSW Steel)
Sajjan Jindal, Chairman and Managing Director of JSW Steel. (Photograph Source: JSW Steel)

Billionaire Sajjan Jindal said the Ruia family should be a given a “fair chance” to take control of insolvent Essar Steel Ltd. despite legal restrictions as the erstwhile promoters are offering to repay the debt in full.

“They (Ruias) should be given a chance. It is their company, if they’re paying 100 percent of the money, so why not,” Jindal, whose JSW Steel Ltd. had unsuccessfully tried to bid for Essar Steel, said on the sidelines of the World Economic Forum in Davos, Switzerland. “The process is not over till it’s over. And it is not over yet,” he said, stressing that JSW Steel, India’s largest steelmaker, is still interested in Essar Steel. “The promoters are saying I am willing to repay every dime. Then what’s wrong with that?”

Essar Steel, one of the biggest assets facing bankruptcy with a debt of more than Rs 54,000 crore, has seen the resolution process go on for over a year now. The committee of creditors had approved a Rs 42,000-crore bid by ArcelorMittal when the Ruias came back with an offer to fully repay the debt. But a provision in the Insolvency and Bankruptcy Code bars erstwhile promoters of insolvent firms from participating in bidding.

“I've been a proponent of Section 29(A) [that bars defaulting promoters from bidding]. A promoter who has ruined the company cannot be allowed to participate,” Jindal said. “Globally, they are allowed. But India is a different country and here if we allow that then the promoters are not learning from their mistakes. And they will get the asset at one-third the price, and which is not fair.”

But if the promoter, even if delayed, is paying 100 percent back then what is the problem? he asked. “The process is still not over, it is still going on.”

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Jindal said even if the Ruia’s offer is in conflict with bankruptcy law’s provisions, it will be a crucial decision for any judicial system to overlook Rs 12,000 crore of public money coming back. “It will be very difficult to say that Rs 12,000 crore is not a big deal.”

If they are paying everything, and if they’ve not been found of doing something guilty in a forensic audit, then what’s the harm?
Sajjan Jindal, Chairman, JSW Steel

ArcelorMittal isn’t amused by Jindal’s comments. “It appears there are certain parties in India who would like that the IBC [bankruptcy code] not be implemented according to the law. The IBC was introduced for a very serious reason—to address a major problem with bad loans,” a company spokesperson said in a statement soon after the interview. “If the law is not implemented correctly and the rules are flouted, as suggested by some, this sends a negative signal about the certainty of India as an investment destination.”

The company said no firm should be allowed to to come in at a late stage without providing financing details, especially after the lenders have taken a decision. “In the case of Essar Steel opportunities have been provided to bidders for nearly a year to first be eligible and second, to make a compelling offer. ArcelorMittal has followed the process from the start.”

Keeping ArcelorMittal Out

That’s not the only reason for Jindal to back the Ruias. ArcelorMittal, the world’s largest steel producer, will find an entry into India if it gets to acquire Essar Steel’s 10 million-tonne-a-year capacity. That’s worrying for JSW Steel, which is currently the top steelmaker by capacity in India.

“That is also of course the case. We are the largest steel producer in India. And to have one of the largest steel producers of the world sitting next to you, you don’t want it for sure,” Jindal said. “If they want it, then they should come in and set up a greenfield plant.”

Hints At Partnership With The Ruias

Jindal said JSW Steel is not yet out of the race for Essar Steel. “It's not done and dusted. It is not over till its over,” he said, hinting at the prospects of a partnership with the Ruias for Essar Steel. “There could be. There is a possibility. Whatever deal will happen, it will happen upfront.”

Jindal said there are no more “attractive” steel assets remaining to be acquired through the insolvency process. Now his company will rely on expanding to ramp up capacity. “By 2025, we plan to organically take capacity to 40 MTPA. And hopefully inorganically acquire another 8-10 MTPA.”

Jindal said the slowdown in China is currently impacting prices and is one of the reasons for a correction. While the demand remains robust, he expects profit margins in the Indian steel industry to be under pressure and contract by a “couple of 100 basis points”.

Watch The Interview Here:

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In the two interviews at Davos in the last two years, you came out sounding aggressive about growth and very confident of being able to expand your business, from capacity and profitability point of view, not just in steel but in cement and some of the allied investments that you have made. Do you feel that the level of optimism is maintained this year?

If you talk about India, the level of optimism remains the same. In India what’s important is that when you grow aggressively, you don’t necessarily overleverage yourself. And that’s what has happened with most companies and most groups that in their desire to grow very rapidly they have taken too much debt and that has been their nemesis.

We have always trodden on a conservative path as far as raising debt is concerned. We have grown mostly from our internal accruals and have retained our debt at a normal level, which can be serviced with a year’s or a year-and-half’s cash flow. That’s been our strategy and has worked extremely well for us.

When you talk about the mood here, which is a global situation because you have global leaders here, obviously what is happening in the world is very different from what is happening in India. There is a trade war between the U.S. and China, the EU is struggling—there’s Brexit, in France you have issues, Italy has a negative growth rate. So, if you look at the world it is very somber in their mood. But India, despite the election year, still remains the place to be in.

India has only one way to go: that’s only going up.
Sajjan Jindal, Chairman, JSW Steel

Over the last two years, we have spent quite a bit of time talking about some of the businesses that you are keen to target through the Insolvency and Bankruptcy Code. You did get on it but some of the larger businesses, it didn’t look like you are may be in pole position. Now it seems like the game turned towards you when it comes to Bhushan Power and Steel. I think tribunal after tribunal decision has made it clear that value maximisation is what they are going to look at and so even though there’s a question of timeline in your case, since your’s is the highest bid, it looks like you might be in pole position. When will you have a final decision on this?

We don’t know when the final decision will come. It is most likely swinging in our favour because we are the highest bidder. They have been very vocal; the judiciary has been vocal that the maximisation of value is the first principle of IBC. It seems like we might get Bhushan Power and Steel.

But you have no idea...this case is dragging for a long time...

But both Essar, and Bhushan Power and Steel cases have been dragging and it is very disheartening to see the businesses go on. It is affecting us in our steel business because both the plants aren’t paying any interest to the bank. So, they have no real financial cost. They are running and sort of ruining the market.

In case of Essar Steel, I will bring the value maximisation mantra here because the erstwhile promoter (Ruias) believes it as his offer’s better than that of by the winning bidder, who has been through 95 percent of the process over a long period of time, his offer should be given a fair chance to succeed. You have been on the bidding side for most of these cases. Do you agree with Ruia analogy?

It is a new reform the government has done. IBC, the whole law and process is new. It is going to iterating process and what is right and what is not right is very difficult to say.

What do you think should be the case?

My belief is that, I am a little bit biased because we still have some interest in Essar Steel. The point is it will be very difficult for any judicial system or any banking governance system to overlook Rs 12,000 crore of public money coming back to the public and you say no because you have not followed the process properly or because you do not qualify due to Section 12(A) or 29(A) or whatever. It will be very difficult to say that Rs 12,000 crore is not a big deal and the highest bidder is ArcelorMittal and should be given. So, we have to see. I don’t have an answer.

In your personal belief, having been a bidder in many of the situations and potentially being a bidder in many more future situations, do you believe if the promoter is willing to come to the table now after the process is almost over with a chance to settle, if his or her offer is higher than the winning bidder’s, he or she should be given a chance?

Should be given. It is their company, if they’re paying 100 percent of the money, so why not. The process is not over till it’s over. And it is not over yet. And the promoters are saying I am willing to repay every dime. Then what’s wrong with that? If they are paying everything, and if they’ve not been found of doing anything wrong or guilty in a forensic audit, then what’s the harm?

So, if you were in ArcelorMittal’s shoes, would you say the same thing?

Yes, I would say the same thing. For example, we and Tata Steel were bidding for Bhushan Steel. They bid higher than us. We never went to the court. We never did anything.

But that’s a very different situation from what 29(A) has created…where erstwhile promoters are not allowed to participate.

Yes, but there’s a big question mark on 29(A) today. I’ve been a proponent of Section 29(A). I have been tweeting about it before this thing came in that a promoter who has ruined the company, he cannot be allowed to participate. Globally, they are allowed to participate. They can buy if they are the highest bidder. But India is a different country and here if we allow that then the promoters are not learning from their mistakes. And they will get the asset at one-third the price, and which is then not fair to the competing bidder. But here, what am saying is if the promoter is paying 100 percent, then why should they not be allowed, even if delayed? The process is still not over, it is still going on.

In Bhushan Power and Steel, we are the highest bidder. Now if Mr. Singhal, who is the promoter, if he pays 100 percent then he should take the asset. Even if we have spent 1.5 years doing due diligence, spending huge amount of money and lot of efforts, but if they are willing to pay 100 percent, then most welcome. Please take it.

Are you saying this because you principally believe in it, which is exactly what you explained from the Singhal point of view, or are you saying this because you’d rather have the Ruias come back in power of Essar Steel than have ArcelorMittal, which is a global steel giant, enter the Indian market.

That is also of course the case. We are the largest steel producer in India. And to have one of the largest steel producers of the world sitting next to you, you don’t want it for sure. If they want it, then they should come in and set up a greenfield plant.

I think you are also looking at very small capacities that are either about to enter insolvency or will in the due course such as Asian Colour Coated Ispat. Do you believe that there are any large opportunities left in steel consolidation through the IBC process? If not, then what is your inorganic route, if any, is there any opportunity left in the next 2-5 years? Will it mostly be organic and where does that leave you in your capacity race with Tata Steel?

No, all the steel companies, more or less, other than Bhushan Steel and Essar are very tiny and aren’t attracting our attention at all. And even the downstream assets, we are not very keen on them.

On the organic front, we are expanding quite aggressively. In 2019-20, we will complete our 6.5-million-tonne brownfield expansion in Dolvi, Maharashtra (5 MT) and Karnataka (1.5 MT). Next year, we plan to expand Vijaynagar plant to 18 MT with another 5 MT. So, by 2025 we plan to organically take capacity to 40 MT. And hopefully, inorganically another 8-10 MT—Bhushan Power is 4 MT and Essar Steel is 8-9 MT.

In case of Essar Steel, is there a possibility of a back-door deal between Ruias and you?

It is not done and dusted. It is not over till it’s over. But there’s no back-door deal, whatever deal will happen, it will happen upfront.

Are you hopeful that may be you’ll have an entry through the partnership with the Ruias or something like that?

There could be a possibility.

Outlook On Steel

What’s the outlook for 2019 when it comes to steel prices both locally and internationally? As well as we have also seen some softening in iron ore as well. How are you seeing that play out? What’s your price and cost outlook for the year?

China is about 50 percent of the global steel capacity and production. China is going through a bit of a slowdown. There has been correction in steel prices and China and that has impacted the world. India also gets impacted. Therefore, there has been some correction in steel prices in India.

Iron ore prices globally are not softening, in fact they have gone up in the last two months. But the Indian prices have corrected in line with the steel prices.

The demand side, however, remains robust in India. That’s not affected.

With the local steel prices and iron ore costs going down, do you believe the profit margin will be maintained through the course of the year or do you see conflicting pressures?

There is a pressure on the profit margin in the steel business. It won’t be as robust as it was in the last two years. Some correction has happened, and coking coal prices haven’t come down, which is a major raw material. Iron ore prices have gone up in the middle and have come back to where it was a year ago. The cost prices have not really come down.

So, there will be margin pressure across the industry?

Yes, there will be margin pressure across the industry.

But will it be substantial, or will it be between 50 basis points and 100 basis points? Or more than that?

Yes, may be a couple of 100 basis points.

But demand is not unaffected at this point.

No, demand is strong.

Typically, in an election year, governments pump money into infrastructure and smaller term contracts. This government has set a good record with road building, etc. But this year it does seem that the fiscal room is fairly limited for any kind of big spend, and if there’s any, it will be more towards the farm and agri sector. So, when you say demand outlook is looking good, what are you basing this on? Because real estate, auto sectors are looking soft, the NBFC financing issue seems to have felt by several consumer-facing industries. So where is your demand optimism stemming from?

Infrastructure spending is strong in the last 2-3 years and that’s continuing because the spend is happening as we speak. So, that’s consuming a lot of steel. The low-cost rural housing is where lot of steel is getting consumed. The auto sector has slowed down from its growth but is not in negative territory. They continue to consume. India has not added new capacity of steel. From that point of view, we are seeing good demand.

Are you seeing a big revival because private capex hasn’t jumped dramatically? There has been improvement, but project revival hasn’t happened at all.

New projects are not really happening. What we are seeing is that capacity is getting consumed. The investment and capacity, which were created in the UPA-II regime, has more or less been absorbed in growth in the country. We are now feeling the need to expand our capacities to meet the future demand of India.

On Real Estate, Energy

How worried are you of real estate softness?

Real estate in big cities are getting impacted. But that’s not area where the steel and cement go. It is more in the affordable and rural housing where majority of steel goes.

What kind of volume growth will you expect in 2019?

Last year the steel industry grew 8 percent. This year it will be probably 5-6 percent with some pressure on profit margins.

Are you on fray of IL&FS renewable energy business?

Not really. We are studying. It is a large asset. We are looking at various renewable energy. Today, we only have hydro in the renewable field. We don’t have solar or wind assets. We are studying it, but I am not very sure.

Why? Is it too big or is it not the right mix that you want?

So the problem is, I believe that we cannot take any asset where the PPA that has been signed with the respective utility companies is at a very high price. We would want to be in the first quartile of price in PPA signing. Because tomorrow the regulators could come up with that it is not in public interest and they can renege on contract. We have seen that happen. So, JSW as a policy would not like to enter acquiring any asset where the tariffs are very high.

And that’s the situation with some of the IL&FS assets?

No, I have not studied myself and I don’t know the exact number…We have not made any mistakes in the power sector. Every company, including that big and old ones, they have all made mistakes. I am very conservative in this approach. We have to be very careful about these things when you are dealing with the masses. I don’t want to sound negative, but I am not very interested.

So, what’s on the anvil for power? Is there anything substantial?

We are looking at a few assets which have got attractive PPA signed and fuel linkages. I don’t want to reveal the specifics. It could be close to 2,000-2,500 MW capacities. Also, a couple of them are distressed and couple of them are nicely operated.

We have heard that in the last three to four months some effort being put by lenders and some players in the power industry to resolve some of these power assets before they have to forcefully hit the IBC process. You are part of resolving some of those assets. So, when do you plan to close these?

I don’t know when these will be closes but we are in discussion in quite advance stages.

In cement, you have taken target of putting installed capacity of 20 million tonne by 2020.

We are on track to achieve 20 MT target by 2020-21. We are with greenfield and fresh capacity. We are also looking to grow inorganically to acquire certain assets. That is one area where we are looking at.

So, is the 2019 year, according to you, hunker down and consolidate?


On Election 2019

You said that the Modi government deserves second term. Why is it?

I believe in continuity. I believe that the last 4.5 years of this government has had a fairly good run. I can rank 7 it from 1 to 10. We haven’t heard of any scam or problems. In the country, if you don’t have a scam and you run the government cleanly, it is a big deal. What we have seen in the UPA II, it is not good for the nation to have so many difficult problems. The government gave good governance for last five years. Now they have learnt a few things that they are waiting to do in the second term.

Such as?

Such as strategic disinvestments, which probably should have been done in the first turn, but didn’t happen. May be that will happen in the second term. This government took a lot of initiatives in reforms such as GST, IBC, RERA, low cost housing, set the goals for the country talking on economic terms, etc. The country has done well. Prime Minister [Narendra] Modi has made India proud in the global arena. He is being counted as one of the global leaders, along with Presidency of China. You need somebody to get up there and get counted.

There are those who are critics of this government who believe that the transparency that should have been there in the rafale deal didn’t come through, there are others who said that this government came in with the slogan of maximum governance, minimum government and has not delivered on that front at all. You speak of public sector disinvestments, that’s one leg of the programme, but we have seen none of that take place. Instead we saw ONGC buy HPCL and some other PSU buy some other PSU and in fact we saw what was a poorly two tended sectors get even more mangled, we have seen some below-the-line accounting, we have seen opacity of data. Also, we have seen some very good schemes on the other hand—Jan Dhan has been great, the articulation of the vision of Swachh Bharat is good, some efforts to revive the power sector. So, both sides in a sense balanced out. Are you wary that a coalition government might not deliver the kind of economic growth that you are hopeful for as a business leader? Or are you politically a conservative person and therefore you want this government to come back to power?

Globally, coalition government has also delivered. So, I don’t see that as a big concern. Dr. Manmohan Singh provided an amazing leadership and did deliver a 10-year government to India. I would say in the second term where things went a little awry. We have short memories and so we tend to forget it. But this government provided there has been opacity in Rafale deal, that’s what the media is talking about, I have not studied it in great depth, so it seems, had quite a spectacular track record.

In hindsight, we can always find faults in anybody and everybody. I am not very wary of the coalition government. But having given five years of his time to run the country, probably for the next five years, I feel, he must be really prepared to do some big reforms.