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Disclaimer• We have prepared this note solely for the purpose of discussion.
• This presentation sets forth our views based on the completeness and accuracy of the facts and any assumptions that were included. If any of the facts and assumptions is
not complete or accurate, it is imperative that we be informed accordingly, as the inaccuracy or incompleteness thereof could have a material effect on our conclusions.
• We have not performed an audit and do not express an opinion or any other form of assurance. Further, comments in our presentation are not intended, nor should they be
interpreted to be legal advice or opinion.
• While information obtained from the public domain or external sources have not been verified for authenticity, accuracy or completeness, we have obtained information, as far
as possible, from sources generally considered to be reliable. We assume no responsibility for such information.
• Our views are not binding on any person, entity, authority or Court, and hence, no assurance is given that a position contrary to the opinions expressed herein will not be
asserted by any person, entity, authority and/or sustained by an appellate authority or a court of law.
• In accordance with its policy, KPMG advises that neither it nor any partner, director or employee undertakes any responsibility arising in any way whatsoever, to any person in
respect of the matters dealt with in this presentation, including any errors or omissions therein, arising through negligence or otherwise, howsoever caused.
• In connection with our presentation or any part thereof, KPMG does not owe duty of care (whether in contract or in tort or under statute or otherwise) to any person or party to
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©2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3
2,991 3,107 3,155 3,428 3,223
3,610 3,896
FY12 FY13 FY14 FY15 FY16 FY17 FY18 (E)
Market size of Indian steel sector (INR billion)
Indian steel sector has grown to INR 4 trillion in FY18, at a CAGR of 4% over the last 5 years
The sector is expected to grow by 6-7% in FY19 on the back of growing infrastructure investment and
supportive government policies leading to better pricing scenario
3.9% 8.7% -6.0% 12.0%
YoY growth rate
1.5%
Note: E = estimated
Source: Annual report 2016-17, Ministry of Steel; Flash report, Joint Plant Committee, March 2017; Steel in India, Marketline, 15 March 2017, accessed via ISI Emerging Markets; KPMG in India analysis; Indian secondary steel industry – Opportunities and Challenges, FICCI, 2015
8.0%
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Construction and Infra shall be the key demand driver
• Basic civic amenities in 500 cities
• Projects worth Rs.65,075 Cr (84%) are
under various stages of implementation
• 83,677 km of highways by March 2022
• 44 economic corridors, inter-corridor
routes and feeder routes
• 415 projects for modernization and port
development
• 6 new ports - in West Bengal, Odisha,
Tamil Nadu, Karnataka and Maharashtra
Source: smartcities.gov.in
• 4041 statutory towns; initial focus on 500
Class I cities
• To be implemented in three phases;
completion by 2022
Cities under Phase I and Fasttrack for Smart India
mission
AMRUT
Bharatmala
Sagarmala
Pradhan Mantri Awas Yojna
PMAY
©2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5
On the other hand, steel supply is clustered in specific areas…APPROXIMATE
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Beyond steel making… there is a significant overhang
No of units Capacity, MT
Re-rolling 1642 51
Hot Rolled Flat products 30 24
Cold Rolled Flat products 155 12
GP/GC 24 7
Color Coated 16 3
Steel rolling capacity in India
Source: Joint Plant Committee
Updated as on March’16
Finished Steel Consumption*, 2017 - 18
Consumption, MT
HR Coils Strip, Sheet and Skelp 25
CR Coils/ Sheets 7
GP/GC Sheets 7.5
Plates 5
Electrical Steel Sheets 0.8
Source: Joint Plant Committee
*Apparent consumption; Real consumption for HR Coils and CR Coils is lower
• Beyond steel making, the variety in India’s steel value-chain is tremendous
• Significant capacity overhang in India which has resulted in limited bargaining power and stressed financials
©2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7
Part of the capacity is in stress; based on local demand-supply scenarios, potential targets can be identified for rapid scale up
Source: Joint Plant Committee
Updated as on March’16
Secondary steel capacity in India (key units) –
region wise, in MT
HR 1
CR 2
GP/GC 1
HR 14
CR 6
GP/GC 4
HR 4
CR 2
GP/GC -
HR 24
CR 6
GP/GC 2
Some of the key capacity in financial stress
Steel capacity in financial stress – region wise, in
MT
Flats 11
Longs 20
Others 1
Flats 13
Longs 4
Others 0Flats -
Longs 4
Others 4
Others includes Pipes, Sponge Iron, Stainless Steel
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Sponge Iron: Geographical dispersion in mineral rich regions
1. Major advantage of sponge iron over BF-BOF:
Smaller unit size, could be established at any location
2. Sponge iron units mostly located in clusters in iron ore/coal bearing regions
Jharkhand Jamshedpur, Chaibasa, Ramgarh
Chhattisgarh Raipur, Raigarh, Bilaspur, Durg
Karnataka Bellary
Odisha Bonai, Angul, Jharsuguda, Sambalpur
West Bengal Durgapur, Purulia, Asansol, Burdwan
Gujarat
Maharashtra
Karnataka
Tamil Nadu
Goa
Chhattisgarh
Jharkhand
West Bengal
Odisha
Telangana
Andhra Pradesh
Source: Joint Plant Committee
©2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 9
Significant part of the current installed sponge iron capacity is unviable
10000
12000
14000
16000
18000
20000
22000
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46
Co
st o
f sp
on
ge ir
on
pro
du
ctio
n (
Rs.
/to
nn
e)
Cumulative Capacity (million tonnes)
Captive Iron Captive Coal >500 350-500 100-350 <100 Gas
Average 1 year price
# Size in TPD and refers to the players without captive iron ore/coal and non gas based plants
Note: The above cost curve is not accurate and only an approximation for the indicative purpose only. It is built on certain broad based and refers only tothe operational cost without interest and depreciation.
Source: KPMG Analysis
1. Cost of production for many units higher than the average price of sponge iron in past year
2. Only kilns of size 350 tpd and above will be sustainable in future
3. Future of gas based plants remains uncertain
JH, OD, WB: Proximity to RM source
Iron ore mines purchased in recent auctions, at high premium
Southern States: Away from RM source
# # # #
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Deal Status till dateAction taken - NCLT In process - NCLT
Bhushan Steel
• Acquired by Tata
Steel
• Cost of
acquisition - INR
36,400 Cr. (INR
35,200 Cr to
financial
creditors and
INR 1,200 Cr to
operational
creditors) against
a debt of about
INR 44,478 Cr.
• Increases Tata
Steel’s capacity
18.6 MTPA
Electrosteel
• Acquired by
Vedanta
• Cost of
acquisition -
INR 5320 Cr
against a debt
of INR 10,734
Cr.
• Marks
Vedanta’s entry
in Indian steel
market
Monnet Ispat
• JSW- AION
Capital plan
approved by
CCI and CoC
• Bid amount: INR
3,750 Cr.
against a debt
of Rs. 10,333
Cr.
• NCLT reserves
judgement on
Monnet Ispat
resolution plan
• Bidders: Tata
Steel and Liberty
House
• NCLAT has asked
the CoC to
proceed with bids
submitted by Tata
Steel and UK
based Liberty
House
• NCLT directs CoC
to complete
resolution
proceedings by
June 23
Bhushan Power &
SteelEssar Steel
• Bidders: Numetal,
ArcelorMittal, Vedanta
• First round bids of
Numetal and Arcelor
Mittal Bids were
rejected.
• ArcelorMittal,
Numetal-JSW Steel,
Vedanta submit bids in
2nd round (complete).
• NCLT declared 2nd
round of bidding as
invalid due to
procedural non-
compliance in 1st
round by CoC & RP.
Other Stressed
Units
• Visa Steel
• Uttam Galva
• Jai Balaji
• Asian Colour
Coated Steel
• Rohit Ferrotech
• Concast
• Ramsarup
• SBQ Steel
• Usha Martin
• Welspun Corp
• BMM Ispat
• Jayaswal Neco
Buying Time…
©2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 11
By 2022, the Steel sector in India is likely to be dominated by 3 players
1. JSW Steel and Tata Steel in
race to emerge as the largest
steel producers in India
2. Due to IBC code and
government’s focus on
controlling NPA’s, the next two
years would see a wave of M&A
in the steel sector in India
3. Considering high capital
investment required and cyclical
nature of market, only big
players are likely to remain in
the sector in the long run
1217 18
712
2
1711
6
5
6 1
2927
23
12 12
6
3
0
5
10
15
20
25
30
35
TataSteelIndia
JSWSteel
SAIL RINL JSPL NMDC Vedanta
Ca
pa
city in
MT
Current Addition expected (including acquisitions) Capacity by 2022
Capacity Scenario by 2022 : India
Source: Annual Reports, NCLT Resolution, Media Reports
©2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 12
Historically, Metals & Mining (Steel) sector has seen significant M&A activity
Steel industry is most susceptible to consolidation due to high capex need, high cyclicality of market,
unique disconnect with raw material part of value chain, vibrant market-structure (i.e. high competition
and high number of potential strategic buyers, Government’s focus on this sector etc.)
-1000
0
1000
2000
3000
4000
5000
6000
0 10000 20000 30000 40000 50000 60000
Dea
l S
ize
(B
il. U
SD
)
Number of M&A deals
M&A Intensity sector wise
Metals &
Mining
BanksOil &
Gas
Food &
Beverage
Professional
Services
Transport
ation &
Infra
Insurance
Software
Sector Cyclicality CapexMarket
Structure
Need of
Raw
Material
Linkage
Metals &
MiningHi Hi Competitive Hi
Banks Hi Low Competitive -
Oil & Gas Hi Hi Oligopoly Hi
Food &
BeverageLow Med Competitive Medium
Transport &
InfraHi Hi Competitive -
Insurance Med Low Oligopoly -
Professional
ServicesLow Low Oligopoly -
Software Hi Low Competitive -Source: Institute for Mergers, Acquisitions and Alliances
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It is important to look at multiple factors while evaluating the opportunity
Raw Material Security
Product profile
1
2
• Raw material linkage is the critical success factor. Accordingly, companies with raw material (coal/ iron ore linkage or
HR capacity in case of CR players) may be considered as valuable.
• Product profile is selected to ensure future potential or forward/backward integration vis-à-vis current experience
or sufficient product mix.
Status of operations
4
• Recently operational facility will have less problems in turnaround. Accordingly, players considered are recently
operational
Scale of Operation
3
• To ensure sufficient scale of operation, production capacity of >0.5 MnT is considered. Also, revenue of > Rs 150 Cr
is considered
+ Quality of Asset + Cultural Fit + Liabilities + …
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In long term, sector potential remains strong; segment wise outlook may vary
SectorsDemand,
FY16
Demand,
FY31Steel Products
Engineering &
Fabrication18 50
Steel forgings
Steel exhaust pipes
Flat steels
Low-alloy structural tubing
Electrical Steel
Steel sheets for electric wire sheath/ Steel sheets w/o annealing/ Steel sheets in high temp atm
Automobiles &
other transport
(Rail, Wagons,
Coaches, Ships)
11 25 – 36
High Strength Steel/ Alloyed Steel Coils/ Plates
D/ DD/ EDD Steel Sheet for automobiles
Electrogalvanized steel
High-strength low-alloy steel sheet and strip with improved corrosion resistance
Micro-Alloyed Steel
Infrastructure &
Construction51 138
Long products (Re-Bars and H-Beams)
Corrugated Galvanized sheet
X-braced wall system
Stud/ girt wall connection
Carbon Structural Steel Sheet
Electrogalvanized steel
Market Size Growth Prof.Comp.
intensity
Source: NSP 2017, KPMG Analysis
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High level view of some assets (CR/ GP/ Coated)…S. No. Company
Capacity
(th. tonnes)
Debt (Rs.
Crores)Location
Linkage / Backward
IntegrationProducts
1Uttam Value
Steel
HR-600
CR-350
GP/GC-250
1,852 • Wardha, MH
Backward
Integration, close to
Mine
HR Coils, HR Sheets/Plates, CRFH Coils, CRFH Sheets,
Galvanized coils/sheets
2Uttam Galva
Steel
CR-900
GP/GC-7545275 • Khopoli, MH
CR and CRCA sheets, GP/GC sheets, Color coated
products
3SteelCo
Gujarat
CR-100
GP/GC-95163 • Bharuch, GJ
HRPO Coils, CR Coils, Galvanized Coils, CRCA & MCHC
Coils, Galvanized Coils
4Jindal (India)
Ltd.
CR-400
GP/GC-350513 • Howrah, WB
CR sheets and Coils, Galvanized Plain & Corrugated Sheet & Coil, ERW Pipes
5Siddhartha
Tubes Ltd
CR- 50
GP/GC-90280 • Rajgarh, MP
Backward
IntegrationBlack & Galvanized Tubes & Pipes
6 Vallabh Group CR-50 48 • Ludhiana, PB CR and CRCA sheets, GP/GC sheets and Coils, Color
coated products, ERW Pipes
7Vardhman
IndustriesCR-50 296 • Punjab
Galvanized tubes, coils, precision steel tubes, galvanized steel pipes, corrugated steel tubes, cold rolled steel sheets
8 Shah AlloysCR-50
HR-150295 • Gandhi Nagar, GJ
Backward
Integration
HR Coils, HR Sheets/plates, CR Coils, CR sheets, rebars,
flat bars, angles, bright/pealed bars
Source: Moneycontrol (data as on March 2017), Industry sources
©2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 16
High level review of some assets (Non-CR)…S.
No.Company
Capacity
(th. tonnes)
Debt (Rs.
Crores)Location
Iron ore
arrangement
Coal
LinkageProducts
1 Visa Steel Ltd. RR-500 2839 • Kalinganagar, OD Sponge iron, pig iron, billets, blooms, bars, wire rods
2 Usha Martin RR-1000 3546 • Jamshedpur, JH Wires, wire ropes, bright bars, strands, specialty steel bars,
specialty steel wire rods, cable, machinery
3 Adhunik Metaliks RR-222 2190 • Sundergarh, OR
Iron ore pellets, TMT bars, ferro alloys, bearing steel, spring
steel, high alloy steel, structural, round corner bars, blooms,
billets, rounds, round bars, flats, stainless steel
4Surana
Industries Ltd.RR-109.8 692
• Gumidipooni,
Madhavaram, TN Billets, blooms, TMT, wire rods, coils, plain rounds, round
corner square, channels, angles, flats,
5Prakash
IndustriesRR-760 720
• Champa & Raipur CG
• Kashipur, Uttaranchal Sponge iron, billets, blooms, ferro alloys, wire rods, rebars,
PVC pipes
6Jayaswal Neco
Ind. Ltd. Longs - 275 3853 • Nagpur, MH
Speciality steel, wire rod, coils, Spring steel, Ductile Iron
Manhole Covers Frames & Gratings
Ductile Iron Gratings, Centrifugally Cast Iron Hubless Pipes &
Fitting
7 Modern Steel Ltd RR-50 168 • Mandi Gobindgarh, PB Alloy and Special steel bars, Precision Auto components, High
Alloy steel ingots
8 Mukand Ltd RR- 335 2586 • Maharashtra Carbon steel - Billets, blooms, wire rods, bars
Stainless steel - Billets, blooms, bars, wire rods, bright bars
Source: Moneycontrol (data as on March 2017), Industry sources
©2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 17
Next phase of M&A likely to happen sooner than later
1 Private Players like Tata Steel and JSW Steel likely to be the largest players in Indian Steel sector; the
dominance may be disrupted by an international player finding its feet in the present wave of consolidation
2 With technological evolution and increased global interdependency, Indian steel sector is witnessing shorter
business cycles; repeated consolidation may be a reality
3 Multiple scenarios feasible,
Scenario 1 – Tata Steel & JSW are able to turnaround the acquisitions in current round early, maintain operational
and financial advantage – a key player in subsequent waves
Scenario 2 – Indian players saddled with major acquisitions make way for other entities, particularly AM & Vedanta
Scenario 3 – Tier-2 and Value-chain consolidation happens with players building geographic diversity in their
portfolio with a lot of action by non-strategic investors (primarily sell-offs)
4 Action will shift to expiring merchant iron/ chrome ore/ manganese ore leases in 2020 – clarity in regulatory
environment required
Thank YouNiladri Bhattacharjee
Partner and Sector Leader – Metals & Mining,
+91 90510 61645