Essar Group rides the cycle of business fortunes

For a conglomerate whose business interests stretch around the world from steel to power to ports to shipping to oil refining to telecom, $250 million may not count for much today.

But back in 1999, when the Essar Group defaulted on Floating Rate Notes worth $250 million issued to foreign investors, after the steel business ran into trouble, it represented one of the darker chapters in the group’s corporate history.

The Ruias, who had founded the Group in 1969, however, weathered that storm, and took the Essar empire to commanding heights.

The Group rose into prominence in 2007 after Vodafone acquired mobile services company Hutchison Essar.

Hutchison paid Essar ₹1,865 crore to Essar to ensure the transaction went through; in addition, Vodafone agreed to pay $5 billion to the Essar Group if they sold their stake. The deal gave the Group enough cash to enter the big league.

Acquisitions spree What followed was a series of acquisitions. These included Canadian steel player Algoma Steel for $1.63 billion; 49 per cent stake in Kenya-based Econet Wireless International; and BPO division Aegis Communications, bought out US-based PeopleSupport for $250 million.

There were also acquisitions of oil-and-gas exploration assets in Vietnam and Venezuela; Zimbabwe’s steel company Zisco for $740 million; and Shell UK’s 12 million tonnes per annum Stanlow refinery for $350 million. The Ruias got Essar Energy listed on the London Stock Exchange in May 2010 and raised $1.8 billion.

$18-billion bet In 2007-08, when the UPA was in power and the economy was firing away on all cylinders (before the 2008 global financial crisis), the Group made an $18 billion bet to expand its operations across the steel, power, ports and oil refining businesses.

Its plans were over-the-top ambitious, even audacious: to take the Group’s assets from $6 billion in 2007 to $20 billion in 2015, and revenues from $5.5 billion to $27 billion.

During this period, the Group built capacities across its businesses ( see‘The Essar Empire’s growth’ ), pumping in $12 billion equity and $14 billion debt.

The downturn But the days of glory were short-lived. Sometime in 2012-13, the tide of business fortunes turned against the Group. Largely hit by changes in the regulatory environment and by the overall weakening of business sentiments after the UPA government was bogged down by scams, Essar started losing momentum.

For example, in the steel business, non-availability of committed natural gas, the main feedstock, coupled with high import prices, resulted in the idling of over 50 per cent the of steel plants’ capacity.

Delays in securing environmental approvals and naxalite activism caused disruptions in the slurry pipeline that would bring the iron ore into the plant.

Similarly, in the power business, the Group’s Mahan and Jharkhand (2400 MW) plants were impacted by the cancellation of the allocated coal mines in the wake of the coal scam.

All this induced stress on the company’s cash flows and led to delays in debt servicing.

“All our investments were planned considering the environment prevailing five years ago. In recent years, certain investments failed to yield expected returns owing to reasons beyond the company’s control,” V Ashok, Chief Financial Officer, Essar Group, told BusinessLine .

Elbow-room to monetise The saving grace for Essar, however, is that it holds close to 100 per cent stake in all its businesses, which offers the scope for monetisation.

The Group has already concluded three deals ( see ‘Assets sold or on the block’ ); the biggest one, under which it plans sell a majority stake in Essar Oil to Rosneft, is close to being finalised.

“We will consider monetisation, like we did for Aegis and Equinox, as and when the assets are ready to attract investors. The proceeds of such monetisation transactions, as and when they are consummated, will be used to pare debt,” said Ashok.

Green shoots of recovery Meanwhile, some the Group’s businesses are showing signs of a revival. The power business, for example, has witnessed a major turnaround with the recent fall in coal and gas prices. This has enabled the company to generate profits after a gap of three years.  The ports business has improved with higher capacity utilisation. The present capacity, at 140 million tonnes, is slated to increase to 170 million tonnes by the end of the current fiscal year.

The oil business, too, has been doing well. Essar Oil reported a seven-fold rise in profits to ₹364 crore in the third quarter of FY 2016, riding on the highest ever Current Price Gross Refining Margin of $13.25 per barrel, compared to $7 per barrel in Q3FY15.

Easing the debt burden Riding on assets sales across its real estate, oil refining and business process outsourcing businesses, the Group is looking to reduce its overall debt from $14 billion to $6-7 billion over the next few months.

Most of the analysts to whom BusinessLine spoke did not want to go on record with their view on how Essar is dealing with the debt.

Off the record, they admitted that the Group was taking some measures to ease the pressure.

“If the Rosneft deal goes through, the lenders will feel more secure. But until then, it will be a game of patience for the banks,” said an anlyst with a broking firm.

Essar, however, insists that things are under control. “The debt across various companies has been refinanced under the 5/25 guidelines issued by the Reserve Bank of India. This has stretched the repayment profile. Future cash flows will be sufficient to service the debt obligations,” Ashok said, adding that there is no pressure from any of the lenders to sell assets.

But in the short term at least, the Group is hunkering down; there are no plans for major capital expenditure on any projects. And no audacious overreach either. The swagger may yet return, but must await another day.    

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