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Wednesday, May 29, 2024

Vizag Steel Plant, a story of cat of nine lives

Rashtriya Ispat Nigam Ltd,(RINL), also known as Vizag Steel, is a public steel producer based in VisakhapatnamIndia. This steel plant was founded in 1971 India’s first shore-based integrated steel plant built with state-of-the-art technology. It was commissioned in Febraury, 1982 with a capacity of 3.0 MTPA of liquid steel. In 2012 RINL became a public limited company.

The company is having one subsidiary, viz. Eastern Investment Limited (EIL) with 51% shareholding, which in turn is having two subsidiaries, viz. M/s Orissa Mineral Development Company Ltd (OMDC) and M/s Bisra Stone Lime Company Ltd (BSLC). The company has a partnership in RINMOIL Ferro Alloys Private Limited and International Coal Ventures Limited in the form of Joint Ventures with 50% and 26.49% shareholding respectively.

RINL, with an exclusive product mix of longs, is the largest producer of “Bars and Rods” in the country with a market share of 9.5% in 2018–19 (Source: JPC) The products of RINL include Rebars, Wire Rods, Rounds, Structurals, Blooms & Billets, and Pig Iron and the company also markets the resultant by-products like coal chemicals (Ammonium Sulphate, Benzol products, etc.) and Slag. Forged Wheel Plant is another unit of RINL being set up at RaebareliUttar Pradesh to cater to the wheels requirement of Indian railways which is likely to start its commercial production shortly.

The company also has blast furnace grade Limestone captive mine at Jaggayyapeta (Krishna District), a captive mine for Dolomite at Madharam (Khammam), a manganese ore captive mine at Cheepurupalli (Vizianagaram). It also has a mining lease for river sand of river Champavathi, Vizianagaram dist., A.P. In November 2010, the company was granted the Navratna status by the Government of India. In 2014-15 RINL prepared its corporate vision plan envisaging a growth target of 16 mtpa by 2025.

Capital Expenditure

On 20 May 2009, RINL launched the expansion project of Visakhapatnam Steel Plant from a capacity of 3.6 MT to 6.3 MT at a cost of Rs. 8,692 crores. But the investment was revised to Rs.14,489 crores consequent to the enhancement of the capacity to 7.3 MT. This project was expected originally to be functional by 2012. The company subsequently completed its capacity expansion to 6.3 MTPA in April 2015 and to 7.3 MTPA in October 2017.

RINL took additional funding support from the government in the form of 7% non-cumulative redeemable preference shares Rs.2937.47 Crs, which was fully redeemed during the period 2011-12 to 2015-16.

RINL completed its modernization of major units and has recorded an annual turnover of Rs. 28,215 crore in 2021–22 which is the highest turnover since inception with a growth of 57% over the previous year 2020-21.

Key Financial Data of RINL during the period 2017 to 2022 (INR in Crs.)

2017-182018-192-019-202020-212021-22
Turnover16618208441581917980  28215
PAT(1369)         97(3910)(1012)       913
Finance costs938.331277.611498.231528.561546
Depreciation    778.26 1057.59110511891196
Cash profit(590.74)1154.59(2705)1772109
Operating profit(194.94)2026.98(1590.53)1697.933694.65
Equity4889.854889.854889.854889.854889.85
Reserves & surplus2331.112462.43(1618)(2426)(1715.30)
Net Worth  7221  7352327224643175
Gross Block2711030393318403360734219.97
Cumulative Depreciation1032711376124811367014792.38
Net Block1678319016193591993719427.59
Secured loans10156.2814975.6316951.1716586.0112342.60
Unsecured loans6519.204615.954789.73  4503.054805.50
DividendNilNilNilNilNil

(Source- Audited Financial Statements of RINL).

As could be observed from the above data RINL’s sales have been growing steadily over the years. The company had paid dividend to the government of India who owns 100% equity for seven consecutive financial years ending 2014-15. However, during 2015-16 to 2017-18 the company had posted losses though in 2018-19 the company has posted Rs.97 Crs PAT. Hence RINL has not paid any dividend to the government since 2015-16.

Reasons for the losses-

Two main reasons for RINL’s losses are –

  1. Huge raw material cost-

RINL does not own captive iron ore mines unlike other Steel companies (both in the public and private sectors). It has been depending on supplies from Bailadila mines being run by the National Mineral Development Corporation and importing coking coal from Austria. RINL is incurring an additional burden of around Rs 1,500 crore – Rs. 2,000 crore per annum compared to other steel plants as it is devoid of captive mines.

OMDC has six mining leases in the state of Odisha with reserves of 206 million tonnes of Iron ore and 44 million tonnes of Manganese ore. The lease rights of all six mines have expired and are inoperative for want of statutory clearances. RINL has investment in OMDC through its subsidiary EIL (Eastern Investments Limited).

  • RINL also has a substantial interest burden on the loans raised for its plant expansion. As could be observed from the above data since 2014-15 the finance cost has been increasing rapidly (Rs. 434.70 Crs in 2014-15 to Rs. 1,546 Crs in 2021-22).

Despite the major constraint in availability of raw material (iron ore) RINL has been striving to continuously improve its overall performance.  Some of the points worth mentioning in this context are:

RINL’s steel production and sales are steadily growing over the years.

Increase in Labour productivity-

 RINL registered Tcs (Tonnes of Crude Steel) /man year 535 (2021-22), 405 (2020-21), 489 (2018-19), 451 (2017-18), 375 (2016-17) showing a consistent enhancement in its labour productivity over the years. This is much higher compared to SAIL whose labour productivity was 474, 396, 389, 344 and 320 during the same period.

High quality standards-

RINL was the first among the Indian steel pants to be certified for OHSAS:18001 Standard for Health and Safety Management Practices and recertification was obtained in 2014-15.

 RINL is a Navaratna PSE. It is the first steel plant to be certified ISO 9001:2008 (presently 2015), OHSAS 18001:2007 and ISO/IEC 27001:2013 Standards. It is also the first PSE to be certified ISO 50001:2011- Energy Management Systems and has acquired CMMI Level 3 certification for s/w development.

Why RINL is not a sick PSU though incurring loss?

The net worth of the company is positive at Rs.3175 Crs.

The gross block of assets which was Rs.14,608 Crs in 2014-15 has increased to Rs.34,220 Crs (i.e., registering an increase of Rs.19,612 Crs) mainly due to capital expansion and upgradation of technology.

RINL has repaid the debt capital of government of Rs.3,000 Crs with 7% interest (i.e., non-cumulative redeemable preference shares) during the period 2011-12 to 2015-16.

RINL has paid dividends to the government in the past though it could not pay the divided since 2015-16 due to continuous losses.

Other factors

India is the world’s second-largest steel producer with production of 124.45 million tonnes (MT) in 2022. The National Steel Policy, 2017 envisage 300 million tonnes of production capacity by 2030-31. Demand for steel in India is growing and RINL is one of the leading players with a market share of 9.5% and is the largest producer of “Bars and Rods” in the country.

RINL has a work force of 15,773 people as on 31.3.2022 and provides indirect employment to several people in and around Vizag city and close to one fourth of the Vizag population depend on it.

RINL has developed the Vizag township and has been significantly contributing in fulfilment of its Corporate Social Responsibility.

Landbank

Currently, RINL has 19,730 acres in its possession whose market value is considered to be more than Rs.1 lakh Crores. The plant is located on 11,794 acres and is sufficient to take the plant capacity to around 11 mtpa. 9,798 acre of the state government land was transferred to it, taking the total land to 21,592 acres.  RINL has given 1,862 acres on lease to various agencies, including the railways, the Andhra Pradesh government for Gangavaram Port and the National Highways Authority of India (NHAI).  Incidentally in March, 2021 Adani ports has acquired 89.6% stake in Gangavaram Port (remaining 10.4% stake held by Government of Andhra Pradesh). In September, 2021 Adani Ports has acquired the balance 10.4% stake, making it a wholly owned venture. Currently, the bulk coking coal imports of RINL are routed through Gangavaram Port.

Incidentally, in the early 2000s, RINL-VSP had come forward to set up a captive port at Gangavaram, but this did not find favour with the then State government, which was keen to set up a minor port at Gangavaram, adjacent to the steel plant, and allow the ownership of the port be in private’s hands. Hence, RINL had to part with 1,100 acres of land at Gangavaram to the state government and in turn got some monetary compensation and a land compensation at Kotapadu, a hundred kilometres away from the coast.

RINL is story of a cat of nine lives that has survived several crisis situations

Vizag Steel Plant is the only steel-manufacturing PSE in the country that has no captive iron ore mine. Parliamentary standing committee on Coal and Steel way back in May, 2015 strongly reiterated its recommendation to the government to allot iron ore blocks to state-run steel major RINL. RINL has requested State Governments viz. Odisha, Chhattisgarh and Andhra Pradesh for recommending reservation of iron ore deposit under 17A(2A) of MMDR Act, 2015, to Ministry of Mines, Government of India.  Ministry of Steel has also requested State Government of Odisha for allocation of an iron ore block in favour of RINL through reservation route. 

In the original Detailed Project Report (DPR) prepared for VSP, a captive jetty was mooted at Gangavaram, on its backyard, so as to put the freight cost at bare-minimum. Adani Ports acquisition of Gangavaram Port has created yet another uncertainty for RINL in this regard. Similarly, allotment of Block No. 5 of Bailadila iron ore mines in Chattisgarh belonging to NMDC to RINL was also part of the original DPR, which has not been done till date and has taken a different twist as under.

NMDC-CMDC is a joint venture wherein NMDC owns 51% stake and Chhattisgarh Mineral Development Corporation (CMDC) owns the 49% stake.  On September 30, 2019, the Ministry of Mines, Government of India gave its approval for the reservation of Bailadila iron ore deposit-4 in favour of NMDC-CMDC for prospecting and mining of iron ore. Adani Enterprises Ltd (AEL) was the successful bidder to be the mine developer-cum-operator (MDO) for the Bailadila Iron Ore Deposit. Bailadila Iron Ore Mining Private Ltd is created as a special purpose vehicle for Adani Enterprises Ltd (AEL) which will act as a contract miner for Bailadila iron ore mine.

Memorandum of Understanding (MoU) was signed with South Korean steel major POSCO by RINL on October 23, 2019, for floating a joint venture company for construction of 5 MPTA greenfield integrated steel plant on the land of RINL. However, this has not taken off so far. In January, 2022 Adani Enterprises Limited announced that POSCO and the Adani Group have agreed to explore business cooperation opportunities, including the establishment of a green, environment-friendly Integrated Steel Mill at Mundra, Gujarat, as well as other businesses. The investment is estimated to be up to USD 5 Billion. The collaboration includes evaluating a joint Integrated Steel Mill at Mundra, Gujarat, based on POSCO’s state-of-the-art technology and cutting-edge R&D capability.  

Critics opine that the above developments have not only totally blocked the chances of RINL getting iron ore supply from Bailadila, down the line POSCO may scrap its MOU with RINL for construction of an integrated steel plant on the land of RINL. Critics also foresee that POSCO and Adani Enterprises Ltd may form a JV and take over the RINL since the GOI has given in principle approval for the sale of RINL, lock stock and barrel. Critics also feel that post acquisition of RINL, AEL can ensure direct supply of iron ore on mining the same from Bailadila to RINL which is located at around 600 KMs, thereby making the takeover of RINL highly profitable.   

Despite all odds, RINL has achieved Hot Metal production of 5.77 Mt in 2021-22 which is the highest for any single unit of Public Sector steel plant in the country. VSP is the only steel plant in India which was awarded four-star rating in exports of steel by DGFT. Though the employees’ unions of RINL have been on agitation for more than 2 years they have ensured that the plant does not suffer and have supported the RINL management in achieving a turnaround.

Therefore, the decision of Cabinet Committee on Economic Affairs (CCEA) in January, 2021 giving in-principle approval for 100% strategic disinvestment of the Centre’s shareholding in RINL, along with management control by way of privatization is to be reconsidered by assessing the above facts. The Union Government has to persuade Odisha and Chattisgarh states to allot iron ore block in favour of RINL through reservation route which will ensure captive raw material supply to RINL and a level playing field for RINL with other PSE steel companies so that the Vizag steel plant not only turns into profits but can go ahead with its plant expansion to 21 mtpa and become not only India’s leading steel manufacturer but also a global player to reckon with.

– Dr. B.N.V. Parthasarathi

Ex Senior Banker, Management and Financial Consultant, Visiting Faculty at Premier B Schools and Universities

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Dr. B.N.V. Parthasarathi
Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 16 years of teaching, research and consulting. 200 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 38 short stories 50 articles and 2 novels published in Telugu. Email id: [email protected]

4 COMMENTS

  1. A very informative article, Sir. However, certain facts need to be highlighted to bring the treatment RINL has been receiving from the Centre, since its inception: 1. Not a single captive iron mine was allotted in the 35-40 year since inception. 2. VSP is paying interest at commercial rates for all its borrowings. 3. Recruitment to VSP is a big joke and employees are retiring in hoards. 4. RINL has a huge land bank, but is unable to leverage the same. 5. Returns from VSP in the form of taxes is itself a testament to its viability. 5. Gangavarsm port, originally envisaged for VSP was handed over to private players for a pitrance 6. Corruption in State level politicians forced them to toe the Centre’s hare brained ideas.

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