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Published on: Oct. 4, 2021, 1:08 p.m.
SBPIL adopts a fully integrated model
  • SBIPL is one of the leading pellet producers in the country

By Lancelot Joseph. Executive Editor, Business India

“The second half of the Covid-struck financial year 2020-21 saw an unprecedented rally in domestic steel prices which seems unstoppable even in the current FY22. Domestic flat steel – hot rolled coiled (HRC) prices are up 40 per cent since April 2020 and prices of long steel – TMT are nearly 30 per cent higher as on March 2021. Steel prices continue to set new record highs month after month. In April 2021, domestic steel players announced further price hikes by up to Rs1,000-2,000 per tonne in HRC and around Rs3,000 per tonne in CRC. HRC are offered at Rs59,700-60,000 per tonne in April 2021, up from Rs36,950 per tonne in April 2020. This is the highest level seen since 2008, the year of the financial crisis”, states a CARE ratings report. 

Clearly, the up-cycle in domestic steel prices is supported by the bullish trend in global steel prices and a revival in domestic demand. The rally in global steel prices was initially driven single-handedly by China until other large economies like US and Europe came roaring back to the market. Sellers who idled capacities due to the pandemic earlier have been slow to ramp up post lockdowns.

Such is the steel story, as the Rs3,064 crore (in fiscal 2021) Shri Bajrang Power and Ispat Limited (SBPIL) which is a part of the Raipur-based Shri Bajrang group established by the Goel family in 2002 has drawn up an expansion plan. “We are expanding to reap the fruits of the demand. We are in the process of expanding capacity for sponge iron, steel melting, rolling mill, ferro alloys, captive power and setting up a galvanising plant, which is expected to be completed within fiscal 2022”, explains Suresh Goel, chairman and executive director of SBPIL. 

“Besides, through our subsidiary Shri Bajrang Steel Corporation Ltd (SBSCL), we intend to set-up a steel unit along with related infrastructure and had already entered into an MoU on 15 December, 2020. However, it made an application in June 2021 to the Government of Chhattisgarh to amend the MoU and the scope of the project will be dependent on government approval for the proposed amendment and the company’s decision to implement the MoU,” adds Suresh looking at SBPIL’s intention to set up a 50MW solar power plant at Raipur, under a greenfield expansion.

For starters, SBPIL is an over two-decade-old company, an integrated steel company based out of Central India and is one of the leading players in India in terms of capacity for sponge iron, iron ore pellets, iron ore beneficiation and captive power. It so happens that the Goel family migrated from Rajasthan state to the then state of Madhya Pradesh, now Chhattisgarh state, during the middle of the 1960s.

They were into the timber business in a small way, taking the wooden logs from the forest directly under auction. Later on, in the 1980s due to a shift in auction system, they took the wooden logs directly from the government. During middle of the 80s the business expanded and procurements were made from imports. 

From timber, cement to steel

During the 1990s they entered in a small way under a joint venture into setting up a midsized cement plant. “However, these timber businesses and cement plants were wrapped up by our family in the early part of 2000s, as the family looking at business opportunities in the steel segment post the liberalisation era commenced during the early part of the 1990s,” says Narendra Goel, MD of the company.

The company has been allotted captive iron mine with an approval to mine 1.2 million tonne per annum (MTPA) and captive manganese ore mines with an approval to mine 13.114 TPA. The ore is used to manufacture long steel products, such as TMT bars, ERW pipes manufactured through tubular section mill, wire rods, HB wires, including binding wires, ferro alloys, steel billets, iron pellets and sponge iron. 

SBPIL currently operates three manufacturing units which are strategically located in Raipur, capital of the state of Chhattisgarh, which has abundant reserves of iron ore, iron ore fines and coal mines, which have been the company’s primary raw material sources. “The strategic location of our units lowers our transportation costs and provides significant logistics and operational efficiencies”, adds Anand Goel, ED of the company pointing out that, the family set up a modern structural steel rolling mill with an initial capacity of 30,000 TPA at Raipur, infusing their own funds and taking nominal working capital loan from the banking institutions. “Thereafter post incorporation of the issuer company, for initial capex expansion part financing was done by promoters and the balance by the banking institutions,” says Anand.

As of May 2021, the aggregate saleable metal capacity of the company was 1.76 MTPA comprising of intermediate and final products while the company has a captive power capacity of 83 MW at all its units including 50 MW from waste heat recovery, which allows it to turn the waste heat from the manufacturing process into electricity generation, thereby minimizing the carbon footprint and reducing the power and fuel cost.

“In an effort to enhance the backward integration, increase raw material security and enhance profitability, we have secured exclusive mining rights in connection with an iron ore mine located at Uttar Baster Kanker, Chhattisgarh. We have also exclusive mining rights in connection with an open-cost manganese ore mine located at Vizianagaram, Andhra Pradesh, wherein the company is permitted to mine 13,114 TPA. In respect of coal requirements, the company has secured coal linkages with South Eastern Coal Fields Limited, a subsidiary of Coal India Limited for an annual supply of 0.603 MTPA on the back of multiple fuel supply agreements,” says Narendra. 

Also, as on May 2021 the company’s installed capacity of iron ore beneficiation and pelletisation plants was 2 MTPA and 1.4 MTPA respectively, which helps the company utilise lower grade iron ore lumps and fines to take advantage of the pricing differential between lower grade and higher-grade iron ore fines. “The access to integrated iron ore and manganese ore mines provides the benefits of reducing the cost of running the business as well as stability in so far as continuous raw material supply is concerned,” observes Anand pointing out that from logistic perspective the company’s units are well connected by national and state highways and railways. “We also have captive mechanised railway siding which helps the company in optimising logistics cost and minimising transit times for raw materials and finished products.”

The company caters primarily to the infrastructure and construction industry in India, especially across the Central and Western regions through 11 distributors with a network of 514 dealers. The customer portfolio of the company comprises institutional and retail customers as part of the institutional portfolio. The company sells its products to institutional customers that are spread across various segments including roadways, thermal and hydel power, railways, metro rails, military engineering services, airports and real estates.

The key institutional customers inter-alia include DilipBuildcon Limited, Marhrotra Buildcon Private Limited, Gayatri Projects Limited, Jhajharia Nirman Limited, Modern Road Makers Private Limited and Sadbhav Engineering Limited. “In respect of retail customer portfolio, the company sells TMT bars, ERW pipes and HB wires through our distribution network to individual buyers. The company believes that its key differentiators in the retail segment are its established track record of delivering quality products, strong brand identity and a well-established distribution network”, discloses Anand.

High barrier entry

Talking about the competition, all companies selling TMT bars and ERW pipes are SBIPL’s competitors. As per the industry survey report of IRR Advisory, the long and special steel product industry is moderately fragmented and business is characterised by way of competition from a number of steel producers in India. Further the quality expectation from customers and end users creates a high barrier for entry into this industry. 

Within the domestic long steel product consumption, bars and rods accounted for the majority share of around 83 per cent in FY21. Similarly, the sponge iron manufacturing industry is highly fragmented and the company competes against a number of marginal players with low production capacities. Also, in the realm of the billet market, Indian steel companies have approximately 30 MTPA of billet capacity, out of which the top seven players including Shri Bajrang Power & Ispat Ltd account for one-fifth of the total capacity of the country.

As regards competition in the pellet markets, Indian steel companies have approximately 85 MTPA which operates at 84.8 per cent of capacity utilisation. The top nine key players in the pellet industry including SBPIL, accounts for 60.7 per cent of the total pellets production in India. 

As regards ERW pipes, India is the third largest manufacturing hub of steel pipe in the world and steel pipes constitutes 8 to 10 per cent of the steel consumption. The Indian steel pipe market is estimated to be worth Rs55,000 crore. The domestic ERW steel pipe industry demand is expected to touch 10 million tonnes by 2022, with an appropriate market size of around Rs60,000 crore..

SBPIL is looking at capturing this market. The company is in the process of expanding its capacity for sponge iron, steel melting, rolling mill, ferro alloys, captive power and the setting up of a galvanising plant which is expected to be completed within fiscal 2022 under brownfield expansion. The company also intends to set up a 50MW solar plant at Raipur under greenfield expansion. 

While the Capex funding under brownfield expansion and the setting up of a 50 MW solar plant under greenfield expansion will be out of internal cash accruals of the company, the expected greenfield expansion through the subsidiary company will happen three years down the line out of internal cash accruals and external debt without any increase in the leverage level of the company.

However, it plans to opt for an IPO through fresh issue for Rs700 crore with an objective of utilising the major portion of proceeds of the IPO for prepayment of its existing term debts. The company got approval from SEBI in August 2021.

Consistent track record

“We believe in proactive prudent debt management. The company’s continuous endeavour is to maintain and sustain low leverage levels. Only because of this commitment the company’s net debt to equity came down to 0.71 and it got reduced further to a level of 0.47 for the first quarter in fiscal 2022. The company’s IPO plan is mainly to reduce further its term debts on its books, so that post IPO, the leverage of the company will be reduced”, says Srinivasan Manoharan, president and CFO of the company.

Financially speaking, SBPIL has maintained a consistent track record of delivering operating profitability since fiscal 2017. For the last five years, while the turnover has risen from Rs1,500 crore (FY17) to Rs2,869 crore (FY21), the profit after tax has increased by over seven times from Rs40.96 crore to Rs302.55 crore. 

SBPIL also derives a portion of revenues from exports and its revenues from exports for fiscals 2021, 2020 and 2019 was Rs3s27.27 crore, Rs145.42 crore and Rs12.21 crore respectively and accounted for 10.80 per cent, 5.46 per cent and 0.45 per cent respectively, of SBPIL revenue from operations.  The TMT bars, ERW pipes and HB wires, sold under the brands – Goel and SBPIL – have incurred advertising and publicity expenses of Rs71.43 crore over the last three fiscals to further establish the brands in their respective categories.

Revenues from sale of TMT bars, ERW pipes and HB wires have been the pre-dominant revenue stream for the company and contributed Rs1,367.58 crore, Rs1,161.63 crore and Rs1,298.88 crore for fiscal 2021, 2020 and 2019, respectively aggregating to 45.12 per cent, 43.61 per cent and 48.37 per cent of the total revenue from operations for the same period. Further, SBPIL has commenced its pipe and tubes division in FY21 which contributed around 3 per cent of overall revenue. Going forward, this is expected to improve significantly in FY22 onwards.

Meanwhile, the current year (FY22) performance continues to remain strong despite the on-going pandemic disrupting the supply chain.  SBPIL clocked operating income of Rs1,176 crore till June 2021 and on consolidated basis Rs1188 crore. The company expects the performance to be at the same run rate in the near to medium term. The group had a healthy liquidity marked by net cash accruals of Rs444 crore in FY21 as against repayment of Rs82 crore. SBPIL has healthy working capital utilisation of around 70 per cent for the last 12 month ended June 2021.

Lastly, with the steel sector looking promising, the Goels are all set to make a splash on the bourse.

Power packed 

The SBPIL group through IA Hydro Energy Private Limited (IAHEPL), which is a 100 per cent subsidiary of SBPIL, had ventured into the production of hydel power setting up a hydel power plant of 36 MW (12 MW x 3 units) in the Chamba district of Himachal Pradesh, totally a run-off river scheme with additional benefits of getting continuous water flow during rainy season as well as during summer season owing to its proximity to glaciers in the region.

IA Hydro initially entered into a PPA agreement with Chhattisgarh State Power Distribution Company Limited (CSPDL) for a period of 35 years at an indicative tariff rate of Rs5.25 per unit. The PPA with CSPDL had a tariff rate of Rs5.25 per unit which was inclusive of transmission cost of power from Himachal to Chhattisgarh, thereby making the net effective rate less than Rs4 per unit, which left the company with no other option than to terminate the PPA and then subsequently to sign a PPA with Haryana Power Purchase Centre (HPCC) in May 2018 for purchase of power for a period of 35 years at a tariff rate of Rs4.50/kWh at ex-generating bus. The power is currently being sold at an interim tariff rate of Rs3.99 per unit. The company has also refinanced the term loan recently with long tenure loan from IREDA for an enhanced period of 20 years which has increased the DSCR significantly to around 1.2 times. 

Though SBPIL has given a corporate guarantee to the loan facilities of IAHEPL which covers the current outstanding of Rs195 crore, the long term PPA and the extended tenure of loan by IREDA have made the subsidiary company adequately capable to service its loan obligations.

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