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Steeling It!

ArcelorMittal-Uttam Galva handshake to bolster the latter’s stock

This article first appeared in the October issue of Wealth Insight magazine that tracks and looks forward at the consequences of the deal struck between ArcelorMittal and Uttam Galva.

The Bombay Stock Exchange (BSE) categorises Uttam Galva, a leading domestic producer of value-added steel, as a small-cap company. It is a secondary steel maker and specializes in cold-rolled steel. In June, 2009 quarter the company reported a profit of Rs 346 crore. It had fallen by 34 per cent on a quarter-on-quarter basis whereas on year-on-year period it saw profits soar by 30 per cent.

The company has been under the spotlight ever since it became clear that world steel giant  ArcelorMittal will turn into a co-promoter. Rakesh Arora, analyst at Macquarie Research says, “The lucrative Indian market puts it on the radar of most companies.”

This was a logical thing for ArcelorMittal, which is facing constraints in starting a greenfield project in India. For Uttam Galva there were positives too as the company may not have been in the best of health, which is clear from a filing by Uttam Galva promoters that they had a 38 per cent stake hold in the company, but out of this, 71.36 per cent had been pledged — this now stands reduced to about 49.97 per cent of the promoters holding as result of a revoking of the pledged shares in mid-September. Uttam Galva Director (Commercial) Ankit Miglani explained: “The amount received out of the share pledge by the promoters had been utilised to fund the company’s operations”.

Targetting Uttam Galva
What makes Uttam Galva such a desirable entity for ArcelorMittal is that the Indian company is a leading supplier of the automotive and the white goods sectors in India. Uttam Galva will provide a ready-made operations foundation for ArcelorMittal, allowing it a running entry into a so-far off-limits economy that is humming and an access to ready-made consumers.

Meanwhile, Uttam Galva too will stand to gain as its supply of raw materials will be secured, but it will also get access to new set of clients, for which there would have been strong competition. In fact, for most of the big auto companies based in Europe, which buy steel from ArcelorMittal, and which are looking to set up shop in India, or are already running them here, it would be natural to source steel from ArcelorMittal. This will apply especially to those auto companies which import fully-built cars into India, the premium ones, because the quality of steel they are looking for can easily be routed to them the Uttam Galva.

Rising Over Constraints
To make his presence felt in the country of his origins, after pulverizing the opposition abroad, Laxmi Mittal should know that building up a business of this nature from scratch is not easy in India — 3-4 years after announcing large steel projects of 12 million tonnes per annum (mtpa) each, L N Mittal-led ArcelorMittal and South Korean steel major Posco are still struggling. Macquarie Research report puts the blame on “allocation of resources, land acquisitions and environmental clearances”, this is despite the full support of the centre.

India’s steel making capacity, which is only a tenth of China’s, is dominated by large local producers Tata Steel, Steel Authority of India (SAIL) and Jindal South West (JSW), which would be very difficult and expensive takeover targets. This is what makes smaller steel firms, which make up nearly half the industry in India, attractive targets given their value-added steel capacity, coal and ore reserves. The circle will be completed with a positive future bias as ArcelorMittal can enable a far more rapid development in Uttam Galva’s capabilities to supply these sectors. Also, buying into Uttam Galva will give Mittal a steel plant that produces a million tonne of cold rolled steel of which 7,50,000 tonne is galvanized, which is considered to be the fastest growing category of steel products.

Compared to this the younger sibling, Pramod Mittal-controlled Ispat industries manufactures just 3,25,000 tonne of galvanized steel. Ispat mainly produces hot rolled steel with a total production capacity of 3.3 million tonne, but then Arcelor itself produces over 100 million tonne of hot rolled steel. But a deal with Ispat would always have been questionable.

Dancing Demand
Global demand for steel slumped by more than a tenth in the past year (2008), but India’s 55 million tonne (mt) steel market has seen demand grow by nearly 10 per cent as its $1 trillion (Rs 48 trillion) economy focuses on building physical infrastructure and because of the surprisingly good performances logged by certain sectors like automobiles, which have seen a magnificent rebound in demand.

The very fact that India is a small consumer of steel in comparison to most bigger economies, means that there is a scope for improvement by companies like Uttam Galva, especially since iron ore is cheap in India and demand growth potential is strong.
The strengths of the market have been espoused by Ratan Tata, Chairman of Tata Steel, too: “Per capita consumption is very low, so the potential is very high.” India’s per capita steel consumption is at 44 kg per year, compared to 100 kg in Brazil and a global average of 198 kg.

Since March, the Indian steel industry is running at full capacity and steel demand in the country is strong on the back of the government’s stimulus plan, private investment and demand from automotives. The future may well be gauged from the words of Seshagiri Rao, Joint Managing Director of JSW Steel, India’s second-biggest steel company by domestic sales: “Most companies are starting to invest again in capacity expansion”.

Deal Dimension

  • On September 4, the promoters of Uttam Galva Steel entered into a share purchase agreement with global steel giant ArcelorMittal.
  • ArcelorMittal Netherlands BV announced it will acquire 35 per cent stake in Uttam Galva Steel for Rs 500 crore which will give it a major manufacturing presence in the country.
  • According to the pact, ArcelorMittal will acquire a 5.6 per cent stake from Galva’s promoter and an additional 29.4 per cent stake will be acquired through an open offer at Rs 120 per share scheduled to close by November 17.
  • If it does not succeed, then the promoters will part with their holding, so that ArcelorMittal can have equal shareholding.
  • ArcelorMittal would also get to appoint three directors on the board of Uttam Galva.

Investor Interest

Two things are amply clear from the ArcelorMittal-Uttam Galva tango and these are; that local steel manufacturers who are already facing stiff competition from their global peers and likely to face more in the futures. They will have to pick a bigger brother to ally themselves with and the moves by these two companies will likely be replicated by others in the steel industry as the new phase of consolidation in the takes off. The second eventuality that is likely to transpire is that it will un-lock value of small Indian companies, opening up greater opportunities for profit for investors.

Although Rs 120 per share open offer is a good price during a commodity bust, but the true value will only be unlocked after ArcelorMittal acquires control and the company announces its future plans.

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