Too many litigations in insolvency resolution process are consuming time and it will eventually dilute the focus of putting the insolvent steel companies back on a productive track, feels Atanu Mukherjee, president, MN Dastur & Co. In an interview with FE’s Mithun Dasgupta, Mukherjee says insolvency resolutions for the larger steel assets through acquisitions will lead to more market concentration.This market concentration can increase pricing power, but more importantly it will help consolidate the industry and bring much higher industry-wide efficiencies by reducing overall costs. Excerpts:
Many debt-laden steel companies are now undergoing insolvency resolution process under Insolvency & Bankruptcy Code (IBC). What is your observation on this ongoing process?
Unfortunately, the process has turned complex and has been turning even more complex. There are several case laws coming in play, too many litigations are consuming time and that will eventually dilute the focus of putting the insolvent companies back on a productive track. A lot of that has to do with nascent state of the IBC laws which are evolving as the resolutions are being worked.
Further, the auction based approach to the highest bidder is not necessarily the only way to resolve bankruptcies where multiple stakeholders are involved and where long-term preservation of economic value is a primary objective. This results in a situation where the prized assets sell for a premium with lesser haircuts, but the vast majority of the smaller assets with good fundamentals may land up with major haircuts at liquidation values. It also appears that the current highest bidder based qualification is pretty similar to the government contracts in tenders where L-1, or lowest bidder, wins.
We have repeatedly seen that such a contracting strategy can have deleterious long-term consequences in terms of life-cycle costs, quality and project timelines. Similarly, careful consideration to creditors interest, stakeholders interests , bidder synergies, intrinsic values of the assets and long-term economic returns should play a key role in bankruptcy resolution — not just the highest bid. Apart from auctions, cooperative bargaining based strategies aided with expert advice should be a key strategy for bankruptcy resolutions.
Major players in the steel sector have participated in the bidding process, but some of the large insolvency cases are witnessing intense litigation between stakeholders. Your comments…
The IBC laws are still evolving as resolutions take place and there are situations where there might not have been sufficient clarity. This led to litigations for redressal. Such litigations are likely to abate as IBC matures into a robust resolution platform for bankruptcy resolution in India. However, even the most bulletproof IBC laws cannot avoid litigations so we should be prepared to have a system for fast tracking litigations in the NCLT and it’s appellate system. This is particularly true if stakes are high and assets are prized assets in industries which might be on the cusp of an upcycle — as is likely the case with the steel industry in India today.
How would resolution of major insolvency cases reshape India’s steel sector? Would acquisition of assets of the bankrupt firms help major players in both domestic and international markets?
Insolvency resolutions for the larger steel assets through acquisitions will lead to more market concentration and it will also lead to potential exploitation of synergies and scale between the acquirer and the acquired. Market concentration can increase pricing power, but more importantly it will help consolidate the industry and bring much higher industry wide efficiencies by reducing overall costs. With large multinational steel makers, many of whom have experience in India as well as critical global markets, there is an opportunity to increase the global reach of the acquired firms through exports. Similarly, it is likely that the world-class acquiring company will be applying the best of management practices and technology to improve the operations and profitability of the acquired firm. There is also substantial automatic de-risking of operations of the acquired firms due to synergies and global scale.
Domestic steel demand had witnessed better growth last fiscal compared to that of previous fiscal. Do you think this demand growth will continue in this financial year also?
Steel is a cyclical industry and goes through long cycles. It appears that the steel and — to a lesser degree — the commodity prices are on a longer-term upswing. Our research shows, that barring unforeseen shocks, it is likely that the steel sector in India will continue to strengthen in the foreseeable future. In the last 18 months or so we have already seen a growth of close to 5% compounded in India. If the GDP grows at about 7% plus average over the next five years, it is quite possible that the average steel sector growth exceeds 6-6.5%.
What kinds of innovation are required to boost domestic steel sector? What is your opinion on the fundamental areas of innovation for India?
In our opinion the fundamental areas of innovation for India are raw materials, process optimisation and productivity of operations. I think that most progressive Indian steel plants have one of the most contemporary iron and steel making technologies at their disposal — perhaps far more advanced than most North American integrated steel plants. However, we have limitations in productivity, energy, quality, raw material optimisations, logistics and emissions leading to erosion of EBITDA potential and efficiency and output losses. This has to do with how we absorb and optimise technology for best operations in the Indian context. The digital plant models, machine learning based process optimisations, metallurgical process models, raw material blend models, AI based plant wide quality control, sensor technologies, predictive maintenance models and logistics models directly address the productivity and output multipliers that can be enabled using these technologies.
Inform us about future plans of Dastur Innovation Labs.
Dastur Innovation Labs (DIL) is a pioneering initiative, by an India based consulting firm to advance the state-of-the-art and state-of-the-practice in steel, metals and mining sectors. It is unique, in that, it brings together the expertise and resources of mature industrial research laboratories based in University of Toronto along with practitioners and research capabilities of India, to solve problems and advance the capabilities of Indian and global steel and metals industries. The vision for Dastur Innovation Labs is to be a worldwide industrial innovation engine for metals and mining industry, by harnessing and integrating people and resources across the globe.
DIL, Toronto is the nucleation point for such an endeavour. We believe that such a collaboration based industrial-research model can be structured around incentives that drive commercial deployment and success. We have thus structured DIL in a way that funding for its future growth is largely driven by commercial success of its projects.