Background
We have been assigned to valuate a small integrated steel plant with installed capacity of about 0.25 million TPA manufacturing products like steel bars and special steels products used in automobile and special engineering applications.
It also has merchant power plant running with waste gases of Steel plant.
Plant was of 15 years old and admitted to CIRP under IBC. Plant has not been operating at the time of CIRP admission.
Challenges for Valuation
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- Plant was not operational for a long time and all the equipment are deteriorated
- Half of the captive plant capacity was intended to feed the grid under merchant plant configuration, but no PPA was in place.
- PPA for merchant capacity of the power plant was not in place, hence they cannot sell power to grid.
- There is no iron ore linkage/ long term agreement for raw material.
The problems leading to impairment in value
- Any bidder who takes over the company has to deal with statutory approvals which have expired, Raw material procurement, PPA for merchant power plant.
- Longer refurbishment time to re-commission the plant.
- Escalation of cost.
Approach
Considering that steel plant was extensively deteriorated, a valuation approach had to be adopted to arrive at valuations which could practically be used to fetch maximum value for the lenders.
Solution Offered
- Valuation of this steel plant under the consideration of going concern on asset valuation basis.
This approach facilitated the lenders to take a decision to dispose this plant in the best possible manner to recover debts.
Also Read, A Flood-Damaged Hydro Project Became Insolvent Under IBC
FAQs:
1. What unique factors influence the valuation of a steel plant?
Steel plant valuations consider specialized elements such as production capacity, ore reserves, type of technology (blast versus electric furnaces), environmental compliance costs, and global steel demand trends.
2. Which valuation method is most suitable for a steel manufacturing unit?
A combination approach is recommended—using asset-based valuation for plant machinery and inventory, coupled with the income approach (DCF) for future earnings, and the market approach for benchmarking.
3. How do environmental and compliance regulations affect valuation?
Costs related to pollution control, waste management, and adherence to government regulations, like emissions standards, are factored into the plant’s valuation as contingent liabilities or capital expenditures.
4. Does plant utilization rate impact the valuation of a steel plant?
Yes. Higher production utilization improves projected cash flows and valuation multiples, while underutilization typically reduces future earnings forecasts and lowers overall asset value.
5. Should investors include scrap value when valuing a steel plant?
Absolutely. The scrap/reset value of steel plant components can significantly support asset-based valuations, especially in decommissioning scenarios or for asset-backed financing.