The recent transformation of the Indian steel industry, accelerated by the Insolvency and Bankruptcy Code (IBC), bodes well for it. The initial cases under the IBC saw some of the largest steel industry assets change hands. This has given global players an opportunity to expand their footprint to India to access a high potential growth market. Even strong domestic majors have consolidated by adding already operating capacities to their portfolio.
The Indian steel industry has been relatively fragmented with the top three-four players accounting for 30-40 per cent of the market. The tail of smaller steel producers is quite long.
An increasing part of the supply side represented by the domestic and global majors will now focus on product and process innovation, value-addition and new business models to enhance value. They will also leverage their competence to sweat the acquired assets while also launching brown-field expansion programmes. Thus, this part of the market will move to an elevated level of quality and competition. However, the remaining segment of smaller players, that is still a commodity play, will continue to experience high competitive intensity, primarily on cost.
Post the clean-up of non-performing assets, and with stronger balance sheets through bank consolidation, banks should be in a position to lend again to the capital intensive steel sector for the significant capacity expansion that the companies have envisaged. However, impact of the cost of capital, always an important driver of profitability, will be accentuated due to divergence in borrowers' ratings, debt waivers and access to capital. The larger players with access to global capital flows stand to gain.
Steel producers will have to reconfigure their outbound supply chain to address new opportunities and threats. In several segments like automotive, global relationships will get extended to India. With stronger R&D budgets and IP, global players are expected to bring in latest technology, improve innovation and boost the 'Make in India' initiative.
After the consolidation, participants will be able to drive economies of scale and cost synergies, particularly in selling, distribution and administration costs, earning higher margins. Functions such as marketing, R&D, new product development, vendor-supplier-customer relationship, and logistics are expected to undergo major transformation. Emergence of stronger domestic and global players may further boost business practices and corporate governance.
Some of the hitherto commoditised businesses (for example, long products) in the B2B2C segments may increasingly move towards branding as players target higher margins. In case of flat or niche products, the depth of the product portfolio is expected to improve as players focus on innovation.
Steel producers will evaluate extension of their value chain to access new markets/customer segments which help leverage their experience and knowledge of downstream markets or new applications. The extended value chain will thus garner attention, expanding the industry's engagement with downstream and also demand expansion for the primary products. The above is also likely to trigger M&A activity in the extended value chain. We may see new players emerge in the downstream segments.
The IBC process is slowly but surely expected to involve the mid-small tier players, which will hasten consolidation. This will give the larger players opportunities to complement their product portfolio, geographic presence or simply target current sites for brownfield capacity expansion.
India is probably the only large market globally offering long-term growth potential and a unique opportunity. Large players have re-focussed on this domestic prospect. This will be in sync with the Indian government's ambitious plan of reaching a capacity of 300 million tonnes per annum.