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Abhinaba Das
MUMBAI, July 17: Jindal Strips, the OP Jindal-controlled stainless steel maker, has embarked on a debt-restructuring exercise to reduce its interest liability, which had zoomed past Rs 90 crore in 1997-98.
The company has begun negotiations with financial institutions to lengthen the maturity profile of its debt outstandings nearing maturity in a bid to take advantage of the prevailing lower interest rates. Jindal Strips is also taking steps to pare its funds cost by around 3 per cent by hedging back long-term foreign currency loans of $25 million into rupee debt.
"We are in talks with financial institutions for conversion of foreign currency loans into rupee loans. This will help us bring down the cost of funds by 3 per cent," a senior company official said. The long-term loans were contracted at high rates of 17.5-18 per cent prevailing then. The company's interest liability had shot up to Rs 93 crore in 1997-98, from Rs 53 crore in the previous year. As on March 1998, Jindal Strips had a net worth of MUMBAI, July 17: Jindal Strips, the OP Jindal-controlled stainless steel maker, has embarked on a debt-restructuring exercise to reduce its interest liability, which had zoomed past Rs 90 crore in 1997-98.
The company has begun negotiations with financial institutions to lengthen the maturity profile of its debt outstandings nearing maturity in a bid to take advantage of the prevailing lower interest rates. Jindal Strips is also taking steps to pare its funds cost by around 3 per cent by hedging back long-term foreign currency loans of $25 million into rupee debt.
"We are in talks with financial institutions for conversion of foreign currency loans into rupee loans. This will help us bring down the cost of funds by 3 per cent," a senior company official said. The long-term loans were contracted at high rates of 17.5-18 per cent prevailing then. The company's interest liability had shot up to Rs 93 crore in 1997-98, from Rs 53 crore in the previous year. As on March 1998, Jindal Strips had a net worth ofRs 657 crore, while its debt-equity ratio stood at 1.4:1. The company's total debt outstandings are pegged at over Rs 900 crore.
For Jindal Strips, the interest burden was all the more acute last year as the turnover figures reflected only a part of its capacity expansion.
"The interest payout looks particularly severe since the capacity expansion was completed in mid 1997-98, and the turnover took into account only six months of the expanded capacity," company sources said. The expansion project has hiked the melting capacity from 1,00,000 tonnes to 2,60,000 tonnes.
While extension of the maturity periods of debt will be contracted at rates of around 14 per cent, the exercise will more importantly result in a lock-in advantage as well for the company.
"Since financial institutions impose penalty on premature repayments of loans, the plausible alternative for us is to extend the maturity profile," company sources said.
Despite last year's increase in interest outgo from Rs 50 crore to Rs 93 crore,the company had actually reduced the cost of funds by around 1.5 per cent.
It had raised Rs 50 crore through an issue commercial paper at 10 per cent, and converted working-capital loans into foreign currency loans. Coupled with overseas loans, the interest reduction measures helped the company pare the average funds cost from 16.5 per cent to around 15 per cent. Jindal Strips, which is set to hive off its non-core businesses, has decided to set up a cold-rolling mill with an annual capacity of 60,000 tonnes. The project will require a capital investment of Rs 320 crore, of which Rs 220 crore will come from financial institutions by way of term loans and the balance will be met through internal accruals.
INSIGHT
Cash-flow position needs succour
Even if the institutions agree to restructure the loans, the financial manouver will not really help the company's cash flow. Although the debt equity ratio of 1.4:1 is relatively good when compared to its peers, the fact is that most of theinstitutional loans were contracted in 1996-97, when the interest rates were higher. The lowering of interest costs by 2-3 per cent could result in lesser interest outgo of around Rs 9 crore. A debenture redemption of approximately Rs 100 crore scheduled for 1998-99 will certainly strain its cash flow. In addition, the sluggishness in demand could result in a higher credit period, which will again require a higher working capital.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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