A3~~iv RESTRICTED FILt CiOrY Report No. AA- 2a Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may I not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized THE INDIAN IRON AND STEEL COMPANY LIMITED BALANCING SCHEME Public Disclosure Authorized June 29, 1966 Public Disclosure Authorized iFC-Department of Investments Africa, Asia and the Middle East CURRENCY EQUIVALENTS U.S. $1 = 7.50 Rs. Rs. 1 = 0.13 U.S. $ Historical Figures Before June 6, 1966 U.S. $1 = 4.76 Rs. Rs. 1 = 0.20 U.S. $ APPRAISAL OF THE INDIAN IRON AND STEEL CCIPAINY LIMITED Dkj%Uftk1MUiJU.Lv-T) A T A 1T1\-T-~ ouflfil~if,I 1 TjpTPnE OF (.ONTF.N!rP Page PREFACE CZTThkM A DtyVi = Ie THE COr^N^Y - - 8 TT T. R A fl7T'flfn III.1~%T A ln f A16 15 iV. rv 1Ui'JU,±aI rPL AI'JJJ 2FlWU1 . MUmOJLU1UINo 17 - 21 V. PROTECTIVE ARRANGar4ETS 22 'Vl. CONCtLvSiOltS 23 Annexes 1. Description of Present Facilities 2. Income Statements 3. Source and Application of Funds Statements 4. Balance Sheets 5. Comments on Financial Statements 6. Capital Expenditure Schedule 7. Map showing location of main Indian Steel Plants in relation to Coal & Iron deposits. PREFACE This report is based on the findings of several missions, the last two including Mr. Richard Lisle of IFC who visited India in the summer of 1965 and again in the spring of 1966. Mr. Robert lKng of IFC and Mr. Hans Pollan of the Bank contributed materially to its preparation. APFRAISAL OF THE INDIAN IRON AND STEEL CO0NPAI4Y LLIITED BALANCING SCHME Summary i. For the last fourteen years, the Bank has been closely associated with the Indian Iron and Steel Company Limited (IISCO). Three Bank loans, totalling US$71 million equivalent, have provided the Company with the foreign exchange needed to implement successfully two major expansion programs, and to make IISCO independent of purchased coal and public rail transportation of coal by developing its coal mines and building a coal ropeway. Although there were delays and large local currency overruns, IISCO made good use of the Bank funds. The objectives of the two major expansion programs were achieved in fiscal year 1962/63, when production reached the new annual rated capacity of 800,000 tons of saleable steel compared to 317,000 tons in 1952/53. Work on the Collieries Development program started in 1963/6b; it is exDected that from 1967/68, it will provide the Company with a progressively increasing sunnlv of coking coal of imnrnved quali+y which will satisfv all expected requirements by 1972/73. ii. With the completion of the previous expansion programs there remains some imbnlance in the works in thatnt-he f+i.fishing mnlls still have unused capacity. The proposed project (the Balancing Scheme) is i-ntpn8pri tor- mn-Vec i+. r)rcih1o fr%-" +^- 4+ intended-- -this to make it -- f-- IISGOTTq 'C to ii+-1ili,,g Acaracexcess caai- by increasing the output of the primary production facilities. By incree-asing iron productio+;n th -ou,gg,h imrovsed las l1uMMn> -- k'rYct--- ~~~~~.. 't'.t _L * Uvf ',JZV.AUeVtA&s -VV..r. V tw . LJOV v 4. 'At ±sO ,' fri C U4.¼'. 6 and the use of the better quality Company coal, 300,000 additional to n s -fngt- st e ee l can be produced f.omLmoCI 1I iic a tLi on. s o. a nAd add ioJr.s to the present steel making facilities. iii. The Balancing Scheme will add about 248,000 tons of various categ^-r i n w4 * o0 s t e e I t UVLLe Ci'JoLIp any I so U IVJJu I, u,L yJ.7 I 1 4 I5 h.. AA-0 / appears that there will be adequate demand in India for the increased r , earl 1t6OO the fra.i of the c has b … by the ComQpainE Aot Amendment which might have permitted the Indian CVVZ4-,a,RIet to coUrvteU uue uovernumenti loas ris u a coriIrolling intere II the Company's shares. A recent agreement between IISCO and the Government established a deflnite iftterstsald repaymrrerit schedule for the Goverimdrit loanis and provided that no conversion would occur as long as the debt service was maulia±ned. v. The project is technically sound; the capital costs are conserva- tively estimated and provisions for contingencies should be adequate under normal circumstances. The capital cost of the proposed project, which is expected to require four years to complete, is estimated at Rs. 277.0 million equivalent. Foreign exchange costs are estimated at Rs. 116.1 million ($15.5 million) and local currency costs at Rs. 160.9 million. - ii - vi. Over the next four years, which is the construction period of the Balancing Srheme. heavv capital expenditures will have to hb financed by cash flow, a reduction in net working capital and an in- crease in lrng-term debt. A $30 millinn Bank Inan is proposed to cover the foreign exchange portion of capital costs ($15.5 million), imported mnint.nn:nton _,n:nroQpares annA replacements"onlnoynman*F.a forf^v- the+.hci Companrvr^.mmnnnar (-tQw mnill;on)i o _nno interest during construction ($5.5 million). In addition, the Indus- tr--ia'l TDev~l^pm.nnt Barbl. of. T.L4a (TMNB w-1 .. -oa-k a of- 'Do. 50 millior to help cover the rupee costs of the project. vii. The proposed financial plan is workable. The earnings of hiie ComIIpany are ex±eclt el to OI-Vi.LVA aeU1, tUu.LhY pli esr 4LlanLdll priutJJuU Bank loans and other debt obligations anticipated. The Company's expectation that it will be able to Carry out the project witho-ut re- course to additional financing is not unreasonable. In any event, additional overvdraft faciitiJes are expected to be available to supple- ment the proposed financial plan and IISCO's capital structure would permit the use of additional overdrafts and additional long-term debt if made available. viii. The Company's earnings will improve through the increase in production and reduction in average operating costs; in addition, IISCO will benefit from the tax incentives for investments under the 1966 tax law. The return from the new investment compares favorably with the earnings of the industry as a whole. Some concern arises, however, over the fast increasing cost of the replacement of fixed assets. IISCO will require, even after completion of the project, substantial capital resources to improve its operations through modernization. ix. The Indian economy will benefit from the increase in domestic steel production which the project achieves at relatively low capital costs. x. Proposed protective arrangements provide for restrictions on short-term borrowings and on any new capital expenditures. The project would be a suitable basis for a Bank loan of US $30 million equivalent for a term of 18 years including five years of grace. T. TUR GOMPANY A, General A ~ m _ _ _4 Tr-- -- 4 - TTP1 1. The present I,dian Iron and Qteel Com.pany Limi ed (IISGO) can into existence on December 31, 1952, as the result of a merger of an oluer companLy, IndianIron and SU C±Uor,pny, and the Steel Cooration of Bengal (S)COB). The original Indian Iron and Steel Company organized by the managing agency of Martin Burn Limited had plants at lKulti, established in 1874, and at Burnpur, constructed in 1919, both producing foundry iron. SCOB, organized in 1937 by the same mnagingiu agents had a steel plant at Burnpur, which began production in 1939, using hot metal from Indian Iron. The two plants at Burnpur were physically integrated so that a merger was logical. B. Properties and Investments 2. The Burnpur plant is an integrated steel works with a nominal installed capacity of 1,000,000 ingot tons, and 800,000 tons of saleable steel per year. It is located in the Damodar River Valley about 140 miles northwest of Calcutta. The Kulti Foundry is about 12 miles from Burnpur (see map Annlex 7). 3. A detailed description of existing facilities with their rated capacities and production data is given in Annex 1. In brief, the major installations include coke ovens, four blast furnaces, a bessemer/open hearth duplex melting shop, and various rolling mills. The plant is well laid out, and is in reasonably good condition, particularly when the age of some of the units and the output that is being achieved are taken into account. h. The Kulti Foundry is one of the largest foundries in India and manufactures iron, steel and non-ferrous castings. The bulk of its production consists of centrifugally cast iron pipes, about 75% of the total. 5. The Company owns iron ore mines at Gua and Manoharpur, which presently supply about 65% of iron ore requirements, and coal raines at Jitpur and Ramnagore which sunnlv about 12% of coal reauirements. The remaining raw materials are purchased. 6. The Company owns the towns of Burnpur and Kulti and provides all the nncipAl services. Nearly half of tbhe workers live in these towns in quarters constructed by the Company. The remainder live in the nearby to+-.mr of Asasol. 7. IISCO has two substantial investments. It owns indirectly, through a trust arrangement (Dalhousie Trust) 13.5, of its own shares which represent the former investment of the original Indian Iron and Steel Company in SCOB.