The Puzzling Divestment of Ferro Scrap Nigam

On September 19, the government approved the sale of Ferro Scrap Nigam Limited (FSNL). For Rs 320 crore, a Japanese firm called Konoike Transport would get 100% equity in the firm.

The news didn’t create too many ripples. Headquartered in Bhilai, FSNL, a subsidiary of state-owned Metal Scrap Trade Corporation (MSTC), is one of India’s lesser-known Public Sector Undertakings (PSUs). In addition, unlike the abortive divestments of Central Electronics and Pawan Hans where the buyers had questionable antecedents, Konoike Transport is an established Japanese firm with investments from global Foreign Institutional Investors (FIIs) like Vanguard and BlackRock.

And yet, the sale needed greater attention than it has received. FSNL’s valuation, given its assets, profitability and ability to diversify into sectors set for rapid growth, seems to be low.

Top Line Profits After Tax (in crores)

*Had FSNL not paid high dividends to its shareholders including MSTC – Rs 11.2 crore in 2022, Rs 9 crore in 2023 and Rs 12.80 crore in 2024 – its cash holdings would have been higher yet.

(Source: FSNL annual report 2023-24; Preliminary Information Memorandum, Department of Investment & Public Asset Management (DIPAM)

In the past, asset valuers appointed by the Department of Investment and Public Asset Management (DIPAM) have combined methodologies like Asset Valuation and Discounted Cash Flow to appraise the worth of state assets.

On the first of these, despite having over Rs 400 crore in cash and hard assets – trade receivables of Rs 202 crore, a bank balance of Rs 124 crore, plant and machinery worth Rs 81 crore and zero debt – against total liabilities of Rs 184 crore, FSNL ended up with a reserve price of Rs 262 crore.

Discounted Cash Flow, which estimates the current value of a firm’s future earnings, throws up even more puzzling numbers. “Our work orders for the next two years stand at Rs 1,000 crore,” said an FSNL employee on the condition of anonymity. “Our pre-tax profits from these alone will be Rs 300 crore.”

Even these numbers are an underestimation. Given its expertise in steel slag reprocessing, FSNL can tap three emerging opportunities – vehicle scrappage, steel scrap for small and medium steelmakers struggling with carbon border taxes, and steel slag for highway construction. The reserve price doesn’t seem to factor in those potential gains to Konoike either.

These questions over valuation, however, are just the tip of the proverbial iceberg. There are other puzzling dimensions to this sale which have not received attention.

A firm which gets work because it’s a PSU

FSNL mainly works with state-owned steel manufacturers.

It gets steel slag from Steel Authority of India Limited (SAIL), Mishra Dhatu Nigam, Rashtriya Ispat Nigam and National Mineral Development Corporation. It leases land inside these plants and separates slag into steel scrap (which goes back into furnaces) and slag aggregates (which are used by steel plants for construction).

The steelmakers gain greater efficiencies due to recycling. As FSNL’s website says, “the recovered metallics are used in place of externally purchased scrap which saves their costs substantially.” As for FSNL, it gets a service charge from these firms.

Hardwired into these supply and sale relationships is a catch. Once divested, FSNL will get steel slag from steel PSUs for just two more years. It will also lose its capacity to sell reprocessed slag to these firms. “This is a production unit which gets raw material because it is a PSU,” said a senior manager in FSNL on the condition of anonymity. “Once it becomes a private firm, slag won’t come to it on nomination basis. India’s steel firms might not buy its reprocessed steel either.”

For this reason, an earlier plan, mooted in 2016, to divest the firm was cancelled. That October, the cabinet committee on economic affairs had given an “in-principle” nod to sell the firm. The very next year, the government scrapped those plans saying the entity has no tangible assets barring machinery. “We are removing FSNL… from disinvestment list because it does not have anything. No land. It just has equipment,” Aruna Sharma, who was steel secretary at the time, told PTI that July. “SAIL permits them to do the scrap sale or making its pellets as it is a PSU,” she said. “So it does not make any sense for a buyer because SAIL cannot give it to a private person for conversion. So what will anybody do by taking scrap machinery,” she added.

This aspect of the firm’s business is why bidders wanted slag contracts, especially those given by SAIL, to be extended by at least 5 years. They were eventually extended for two years.

The first two questions arise here. If FSNL will lose its raison d’etre in just two years, why did the Centre cancel its previous decision to not sell this profitable firm? Also, why would Konoike want such a firm?

A firm which straddles large market opportunities

In its Preliminary Investment Memorandum for FSNL, DIPAM makes an uncomplicated sales pitch. It talks about opportunities in the scrap handling and slag management sector and pitches FSNL as a beachhead for firms looking to serve the steel sector.

Along the way, it misses three potential areas FSNL can diversify into.

The first is within the global steel industry. Spurred by carbon taxes, the sector is trying to go green. Steel can be produced from ore and from steel scrap. The first of these is energy-intensive and, ergo, only large firms are in a position to invest in decarbonised forms of energy like hydrogen and small and modular nuclear reactors as they try to stave off carbon taxes.

Steel produced from scrap, however, is less energy-intensive and polluting. “As the steel industry decarbonises, firms can either decarbonise by investing in hydrogen or other modes of green steel – or they can buy scrap steel and use that for their furnaces,” said a senior manager at Vizag steel plant in Visakhapatnam, on the condition of anonymity. “For mid-rung firms, the latter is an easier option.”

In other words, if FSNL can diversify its slag supply beyond state-run PSUs, it will find customers. As things stand, the firm already works with Arcelor Mittal.

There is also rising interest, from Nitin Gadkari’s Ministry of Road Transport and Highways, to use steel slag for highway-building. Vijay Joshi, the founder of an Australian firm called Dr Slag, which advocates the use of slag for highway construction, is working with Gadkari as an advisor. “On August 7, Gadkari wrote to steel minister H.D. Kumaraswamy asking if the steel ministry can start a pilot project under the supervision of Dr Joshi for commercial use of waste slag in highway construction,” the senior FSNL manager told The Wire. “A month later, on September 18, the top brass of FSNL were called by the Steel Ministry to Delhi where they were told to develop ways to use steel slag for roads. The next day, however, FSNL’s sale was announced.”

The third area FSNL can move into is vehicle scrappage. Also led by Gadkari, India has launched a vehicle scrappage policy which wants to scrap all vehicles – whether private or commercial – that are over 15 years old. Apart from boosting vehicle sales, the policy is also expected to dramatically reduce scrap imports and raw material costs for manufacturers. In 2021, the eventual size of this market was pegged at $6 billion . An observer of Indo-Japan trade relationships pegged this number even higher. “Steel scrap will be a $50 billion business in India over the next 25 years,” he said on the condition of anonymity. As firms vie to dominate this sector, FSNL appears to be a prime catch. “It has the infrastructure and the technology,” the observer said. “Owning this firm will cut the buyer’s lead time for entering the segment.”

In essence, FSNL seems to have two potential revenue streams. It can charge for reprocessing steel (from steel-makers and scrapped vehicles) and sell the reprocessed steel to small and medium steel-makers, and leftover slag to highway builders.

A third question lies here. If FSNL can diversify into new markets – green steel; highway aggregates, scrapping vehicles – shouldn’t its reserve price capture some of that value?

According to the Preliminary Information Memorandum for FSNL, the firm’s valuation was done by Delhi-based AAA Valuation Professionals LLP. The transaction advisor was Mumbai-based BDO India LLP. The Wire wrote to officials in all three organisations – secretary Tuhin Kanta Pandey, financial advisor Amit Ray and joint secretary Manoj Kumar at DIPAM; Maulik Sanghavi, a partner at BDO India and Ankit Goel, a designated partner at AAA Valuation Professionals – asking them to explain the Rs 262 crore valuation.

The fourth question lies here. FSNL could have just as easily diversified into these segments even without divestment. So, why is it being sold?

This question was posed to the three DIPAM officials as well as Union steel secretary Sandeep Poundrik. They didn’t respond. This article will be updated when they do.

The centrality of FSNL to MSTC’s financials

In the days after the sale, India’s financial dailies alluded to the country’s disinvestment targets while reporting on FSNL’s sale.

As justifications go, this one was poorly thought-out. The Rs 320 crore from Konoike will go to MSTC – not the Centre. Given that 35% of MSTC’s shares are publicly held, even if MSTC transfers sale proceeds to the government as a dividend, the latter will net Rs 208 crore.

Each divestment is a cost-benefit exercise. In this case, the Union might get Rs 208 crore. But what about the costs?

MSTC is a starting point. In 2023-24, it posted a consolidated revenue of Rs 750 crore – and profits after tax (PAT) of Rs 204 crore. To put these numbers in context, FSNL’s top line profits stood at Rs 467.72 crore – and its PAT at Rs 64.92 crore. This point came up in a MSTC investors call in November 2023. “If I’m not mistaken, (FSNL) contribute(s)… about 30% in our topline and about the same in our bottom line,” one analyst asked MSTC’s management. “So, then whether it is in our interest to divest that stake?”

In response, the MSTC’s management said: “FSNL disinvestment is being done by the government of India itself, DIPAM specifically,” said Bhanu Kumar, an MSTC director (commercial). “We are also just a party to the entire process, and when we are not in a decision-making position, there is no point in saying whether it is good for the company, bad for the company, only time will tell.”

What is incontrovertible, however, is that MSTC’s dividends from FSNL will stop and its top line and bottom line profits will both shrink. MSTC’s share price is likely to fall as well, with its own attendant implications. This is the fifth question. How does the Centre’s potential Rs 208 crore gain compare with the wider losses to MSTC?

There are yet wider costs. Firms like SAIL have to make alternative arrangements for slag disposal and reprocessing.

The Wire posed this question of larger costs – the corollary to the government’s gain of Rs 208 crore – to Pandey, Ray, Kumar and Poundrik. This article will be updated should they respond.

1. Why is a profitable PSU being divested?
2. Given zero debt, assets of over 400 crore and an order book of Rs 1,000 crore, is Rs 320 crore a fair valuation for FSNL?
3. Were revenues from potential diversification into vehicle scrappage, steel scrap sales to steelmakers and slag sales to highway builders considered while arriving at the reserve price of Rs 262 crore?
4. Why is FSNL being sold instead of being allowed to diversify, as a PSU, into these sectors?
5. Why was the 2016 decision against selling the firm reversed?
6. The centre might make Rs 208 crore. How much will the MSTC, which gets a third of its revenues from FSNL, lose?

Who is Konoike Transport?

As global firms go, Konoike is not especially large.

Its group sales for FY24 stood at 315,029 million yen, or over17,000 crore. Its profits stood at 11,462 million yen, or around Rs 640 crore.

It’s a diversified group with interests spanning logistics, healthcare and steel – a point that was emphasised by the finance ministry while announcing the sale. “Konoike’s steel division is a long-established segment of the company, with over 140 years of experience in steelworks operations,” said the finance ministry in a statement about the approval granted by a government panel comprising Gadkari, Kumaraswamy, and finance minister Nirmala Sitharaman.

The firm is not new to India. It entered the country in 2008 through a subsidiary called Konoike Asia (India), which has now been renamed Konoike India. It’s a small firm. Its revenues from operations in FY24 stood at Rs 14.82 crore and its PAT at Rs 38 lakh.

In India, Konoike India has focused on international forwarding, installation of machinery and equipment, and plant relocation, and is expanding its logistics and packaging business. Apart from this firm, Konoike has three more firms in India. Two of these – SPD India Healthcare, which provides sterilisation services to over 150 hospitals in and around Delhi; and Carna Medical Database, which works with Japanese firms eyeing India’s healthcare market – focus on healthcare. The third firm, Joshi Konoike Transport and Infrastructure (JKTI), works as a container train operator between Delhi and three ports on India’s west coast – Pipavav, Nhava Sheva and Mundra.

Ministry of Corporate Affairs (MCA) filings show that JKTI is a 51:49 joint venture between Konoike Transport and New Delhi-based Associated Container Terminals Limited (ACTL) with Konoike holding the majority stake.

In its response to The Wire, Konoike Transport said it is “currently in the process of share transfer of FSNL. We plan to issue a news release after the share transfer (scheduled for January 2025), so we would like to respond in accordance with the contents of this news release.”

In the meantime, however, FSNL’s divestment remains a welter of unexamined questions.

At this time, the only pushback to the sale is coming from FSNL’s employee unions. They have challenged the divestment in the Delhi High Court.

M. Rajshekhar is an independent reporter writing on energy, climate and kleptocracy. His book, Despite The State: Why India Lets Its People Down and How They Cope, was published by Westland Books in 2020.