India’s steel and iron industry is seeing a few mergers and acquisitions, but majority of the 750 companies manufacturing steel, iron and related products are unlikely to get acquired because of their debt, small scale and poor market conditions, experts say.

While a few acquisitions have taken place—Welspun Maxsteel Ltd and Ispat Industries Ltd were acquired by JSW Steel Ltd and media reports say the company is also in talks with Bhushan Steel Ltd for acquisition of a plant—the combined `3.16 trillion debt of the listed 163 companies could be a concern for lenders, the experts add.

Falling prices, low demand and imports that beset the top firms, Tata Steel Ltd, Steel Authority of India Ltd (SAIL), JSW Steel Ltd, Essar Steel India Ltd, Jindal Steel and Power Ltd and Bhushan Steel Ltd, which have a combined debt `2.49 trillion, have hit the smaller companies much harder, putting their viability to test, analysts say.

Some mid-sized firms with large debts include Jindal Stainless Ltd, the 1.82 million tonne (mt) integrated stainless steel maker with a debt of `11,220.58 crore at the end of 2013-14 and a debt-to-equity ratio of 13.25, as per data from Capitaline, an information provider.

Sponge iron maker Monnet Ispat and Energy Ltd that is coming up with a 1.5 mt integrated steel plant has a debt of `10,736.82 crore with a debt-to-equity ratio at 3.36.
Electrosteel Steels Ltd, has set up a 2.5mt integrated steel plant and has a debt of `8,389.43 crore with a debt-to-equity at 4.72. Jindal SAW Ltd, which caters to the pipe market, has a debt of `5,988.98 crore and a debt-to-equity ratio of 1.54.

Emails sent to the companies seeking details about their debt management and asking if they would be selling assets and equity did not elicit any response. C.S. Verma, president of the newly formed Indian Steel Association and chairman of SAIL, did not respond to a questionnaire asking if the debts were a concern.

“Nothing much will be sold… They will restructure their debt and wait for the tide to turn,” Giriraj Daga, an analyst at Nirmal Bang Equities Pvt. Ltd, a brokerage. “Companies are loaded with debt and banks will take a hit.”

Other companies with high debt-to-equity ratios include Mukand Ltd at 10.29, Bhuwalka Steel Industries Ltd at 15.47, Steelco Gujarat Ltd at 19.15, Bilpower Ltd at 17.31 and Crimson Metal Engineering Ltd at 13.45, Capitaline data shows.

Firms have already started asset monetization or restructuring debt. Last month, Essar Steel raised $1 billion through long-term export securitization to prepay existing rupee debt and prior to that, it had raised $1 billion through external commercial borrowings. Jindal Stainless has a mandate from its board of directors to explore the options of “asset reorganization”.

Though converters—that basically process steel sheets and pipes—are unlikely to be affected as hard as the steel and iron manufacturers, large integrated steel manufacturers with captive mines are likely to be hit on the costs front because of their cheaper resource.

“JSW can be an acquirer… only Bhushan and Usha Martin are attractive enough, others are too small to be of interest,”?said Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India) Pvt. Ltd. “Bhushan’s debt is much higher (50% more than fair value) but JSW will still like to pay... Usha Martin is not in distress and not available for sale.”

If the steel demand does not revive by the next fiscal year starting 1 April, a worse case scenario would be banks forcing mergers and acquisitions or asset sale transactions, the analysts said. “Each one has to be seen on a case-to-case basis and, of course, the bankers will have to force the transactions,” said another analyst not wishing to be named. “A lot of these companies are surviving on bank money.”