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1992 batch of Sensex stocks: Mukand Limited - Views on News from Equitymaster

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1992 batch of Sensex stocks: Mukand Limited

Sep 26, 2012

In India, steel industry in pre 1990s was under the government control, particularly the integrated steel sector. But in the early 1990s, the sector was liberalized and enlisting by the private enterprises was allowed. After passing through the initial phase of stabilisation following the economic reforms and liberalisation, the steel industry experienced rapid growth. The industry however experienced a difficult phase between 1997 and 2001. This was due to the severe recession in the global economy which led to demand-supply mismatch with potential production capacity being much higher than demand. Prices of a few types of steel during this period touched a 20-year low and most producers in India made heavy losses. Many firms were forced to shut down leading to loss of jobs. One such company which suffered heavy losses during this period was Mukand Limited.

About the company

Mukand Iron & Steel Works Limited, re-christened 'Mukand Limited.' on and from March 23, 1989, was registered on November 29, 1937. The company is a part of the Bajaj Group and produces alloy steel and stainless steel in India and most of the revenues come from the steel division. The Company has also ventured into diversified businesses ranging from manufacturing of alloy & stainless steel long products, building machines to handling Turnkey Projects.

What went wrong?

The company had made substantial investments, directly and through subsidiary companies, in real estate and other non-core assets prior to FY98 with a view to get attractive returns on the large cash surplus with the company. These investments were made before the company decided to implement the Ginigera Steel Project (GSP) and later on due to downturn in the real estate and the associate sectors, it had not been able to liquidate these assets to finance the GSP. Hence, the company borrowed funds to finance the increased cost of project due to cost and time over-run and took a view that it would continue to look for ways to profitably liquidate its investments in non-operational assets. Even as company's cash flows declined sharply, the company debt continued to increase. As a result, the company reached a stage where it was unable to service its debt servicing obligations and its bank borrowings also became irregular. As a result the company entered into a Corporate Debt Restructuring plan (CDR) which was approved in July 2003 and helped the company in getting back to its feet.

The company incurred losses from 1999 to 2004. It returned to profitability in FY05 and showed profits till FY08. Steel being a cyclical industry, was again impacted during the global recession of 2008-10. As a result, the company again posted losses in FY09, but managed a turnaround in FY10. However in FY12, scarcity of iron ore, a major input for steel making and its rising cost, depreciation of the rupee resulting in higher costs of imports, escalating fuel and interest costs, inflation and slow growth in the economy all had a negative impact on the performance of the company. As a result, the company incurred losses in FY12.

History might repeat itself

The company has again undertaken expansion projects. But history might be repeating itself. Company's new capacities will take some time before they start yielding results and tight cash position might once again see the company going southwards.

1992 batch of Sensex stocks Series - Previous: Bombay Dyeing | Next Ceat Ltd.

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