The Essar group plans to reduce debt by $10 billion with the sale of its oil refinery, related assets and BPO business. Prashant Ruia, Director, Essar group, tells Business Today's Nevin John that the group will be able to generate revenues of $15 billion even after selling the oil refinery by full utilisation of assets in steel, power, ports and the refinery in the UK. Excerpts:
Where do you see the group after the Essar Oil deal?
Our assets are now operating at 75-80 per cent capacity. All our core sector businesses - steel, power and ports - have registered strong operational performance in 2016/17. We are focusing on better utilisation of assets, ramping up production and increasing operational efficiencies.
Over the last six years, we completed an $18 billion investment programme in long gestation core businesses. Now as we have entered the operational phase, our assets have started delivering value. We decided to monetise our stake in a business where we created world-class value and felt the valuation was attractive and timing opportune. The perception that we have high debt is incorrect. The promoters have at various points of time infused equity totalling Rs 55,000 crore.
Won't the sale erode Essar's group revenues?
Yes, group revenues will come down to an extent. However, post transaction our revenues will still be about $15 billion. This is where we were in 2011 when we commissioned the expanded 20-million-tonne Vadinar refinery and Essar Oil had just started generating revenues comparable to current levels. So I don't see it as significant erosion.
How do you plan to deploy proceeds from the sale of Essar Oil assets and Aegis BPO?
We aim to reduce debt at the operating company level - Essar Oil, Essar Power and Essar Ports - by $5 billion and $5 billion at the holding company level. At the operating company level, the assets that get transferred to the new owners are Essar Oil's refining and marketing businesses; the 1010-MW Vadinar Power Company and the 58-MTPA Vadinar Oil terminal - both of which are captive to the Essar Oil refinery. The enterprise value of the deal is $12.9 billion. The total debt of these assets gets transferred to Rosneft and the Trafigura-UCP consortium.
How do you plan to turn around Essar Steel?
The steel industry was caught in the severe commodity down cycle impacting performance over the last three years. Essar Steel could not ramp up production since its contracted gas supply was cut off by the Government of India. Our plants were not producing enough to achieve economies of scale; capacity utilisation had dropped to 30 per cent. The dumping of steel at predatory prices has been addressed and there is global improvement in steel prices, leading to better capacity utilisation.
A restructuring proposal is under discussion with banks. Meanwhile, Essar Steel has nearly doubled production. More than 50 per cent of our sales are in the value-added product segment, giving better realisation. With better sales realisation, high capacity utilisation, and restructured debt, we should be able to service our debt obligations comfortably.
Despite repaying Rs 20,000 crore in the last three years and infusing promoter equity of Rs 9,000 crore in Essar Steel, banks didn't give you additional time nor were interest rates reduced. Will it put pressure on growth?
We have cordial relations with our lenders. Reduction in interest rates and the extra time for repayment are part of the restructuring proposal. That got delayed due to lack of clarity in guidelines and the route to be followed - be it S4A, JLF or CDR. We have supported businesses like Essar Steel, even during the most difficult phases by infusing additional equity and honouring our obligation to lenders.
There was talk that the power utility would sell two gas-based plants in Gujarat to reduce debt. There were reports of the group selling Stanlow refinery. Are you pursuing sale of more assets?
We have no plans to sell any of our other assets. Gas prices are down and we intend to restart gas-based power plants. We continue to remain invested in oil & gas through Stanlow. It has over 15 per cent share of the UK market, and brings in $5 billion in revenues.
Essar has an aggregate debt of Rs 1.38 lakh crore. What will be your future strategy in handling the debt?
We will be reducing debt by almost 50 per cent from proceeds of the Essar Oil and Aegis sale. Our balance sheet, post the deleveraging exercise will be much stronger in the medium and long term. Much of our past woes were because of government policies which have been addressed.
The power business is in losses at a consolidated level. What steps are being taken to reduce the debt?
If we have debt of Rs 20,000 crore in Essar Power, we have also infused Rs 12,000 crore in equity. Eight of our nine plants are operational. We have had a 49 per cent growth in power generation in FY 2016-17, with more than 1,300 MW of new capacity coming on stream. So Essar Power has already turned around as we speak.
What about the shipping business?
Shipping is a cyclical business and the Baltic Dry Index has gone through a lot of volatility in recent years. However, there has been healthy growth in cargo handling and capacity utilisation because of the higher capacity utilisation of Essar Steel, which is one of Essar Shipping's key customers. Our dry cargo traffic increased 22 per cent in the last fiscal. We scrapped some of our older vessels and are planning to add newer ones.
What is your medium-term outlook for Essar?
The difficult period is behind us. I am very positive about the future. We have to remain prudent in making choices. The markets today do not support large greenfield projects. Banks have seen very low credit growth over the last five years. So I don't see any new business forays for Essar. We have to be dispassionate about decision making. Monetisation was a bold decision for us and we have been lucky to have an excellent team to support us. In fact, we will continue to work together as a family and a team to create value in our businesses.