 "Investors see turnaround taking hold at Essar")
One of the biggest blows came in January 2012 when the Supreme Court directed Essar Oil to pay Rs 6,309 crore in sales tax to the Gujarat government, dismissing its plea seeking exemption for its Vadinar refinery. Essar Oil was originally granted sales tax deferment by Gujarat as an incentive after it agreed to build a refinery in the state in 1999. As the company was unable to meet the deadline for the refinery, the state revoked the exemption. The Vadinar refinery commenced operations in 2008 with a capacity of 10.5 million tonnes per annum. By March 2012, its capacity had been increased to 20 million tonne and its complexity upped significantly. (Higher complexity means that it can convert cheaper crude into valuable fuel output and thereby improve its operating margin.) But this cost the company about Rs 10,000 crore.
The two factors together took Essar Oil's debt to Rs 24,741 crore at the end of 2012-13 and its debt-equity ratio went haywire to 12.9. This proved a drag on its earnings. Thus, the company reported revenue of Rs 25,131 crore for the December-ended quarter and EBITDA of Rs 978 crore, but the interest payout was as huge as Rs 812 crore. "In January 2012, everybody said in the western world that you can write off the refinery because of this," admits Lalit Kumar Gupta, managing director and CEO of Essar Oil.
Taking on the interest burden
It is this problem that Essar Oil plans to fix now by dollarising its debt. This will help it reduce the interest burden. The company couldn't do this earlier as it was under corporate debt restructuring. But now it has come out of it. The total debt on Essar Oil's books is Rs 21,000 crore, or about $3.5 billion, of which about $900 million is already in dollars. It is planning to dollarise the rest in the next two quarters. "This will help us save 6 per cent interest cost; that is what we need to do and that is what we are working on," says Gupta.
Similarly, Essar Power (it has the capacity to generate up to 3910 Mw of electricity) also suffered after Essar Energy got listed in 2010. The company's gas-based plants could not run due to constraints in domestic gas supply and the high cost of imported gas. This affected the company's cash flows, which caused problems in servicing the debt which stood at Rs 18,135 crore at the end of 2012-13. Consequently, Essar Power reported a loss of Rs 175 crore in 2012-13 (on a revenue of Rs 2,712 crore), though it had EBITDA of Rs 1,359 crore. Now the company is working on renegotiating the debt which could push up maturities and signing new fuel agreements. Essar Power also plans to convert its plants at Hazira (515 Mw) and Bhander (500 Mw) to coal from gas. This has given investors hope that there could be an upside in Essar Energy's valuation.
Actually, the turnaround seems to be happening across the group (other companies include Essar Steel, Essar Port, Essar Shipping and Essar Projects) which was straddled with debt of Rs 98,412 crore at the end of 2012-13 (up from Rs 85,224 crore in the previous year), according to a report by international brokerage Credit Suisse published in August 2013. The group's debt-equity ratio was 2.4 and debt-EBITDA ratio was 7.3 at the end of 2012-13, the report added. (In comparison, the Reliance Anil Ambani group, which had debt of Rs 113,543 crore, had a debt-equity ratio of 0.5, the report said.) But Essar has contested the concept of group debt. "All debts are linked to the projects; there is no concept of group debt," says an Essar spokesperson.
The group, which has a turnover of over $39 billion, undertook a massive expansion programme worth $18 billion across its businesses of refinery, power, steel and port during 2007 to 2014. This saw the group increasing its steel capacity to 14 million tonnes per annum from 4.6 million tonnes, power capacity to 4000 Mw from 1015 Mw, refining capacity in India to 20 million tonnes from 10.5 million tonnes (it also added 14 million tonnes of refining capacity in the UK), and port capacity to 104 million tonnes from 40 million tonnes. Now that the companies have completed their capital investments, there is significant growth potential in revenue and earnings. But this expansion has caused debt to pile up. According to the Business Standard Research Bureau, these businesses had a collective debt of over Rs 83,812 core in 2012-13. "The issue is not debt, it is cash flow because banks give you money for seven years when they should give you for 10 years," says the spokesperson.
To address the problem, the group has embarked on a three-pronged strategy: optimise processes and operations at the asset level, book debt in the same currency as the revenue in order to de-risk against exchange rate fluctuations (for example, if the revenue of a company is in dollars, then the debt too should be converted into dollars), and replace term loans with corporate bonds. With these efforts, Essar expects almost Rs 4,000 crore of annual savings in terms of interest cost across the group. The all-important questions is: will that be enough?
Firdose A Vandrevala
Amongst all Essar companies, Essar Steel had the highest individual debt of Rs 35,180 crore in 2012-13, with a debt equity ratio of 5.38. The company reported a loss of Rs 4,980 crore in 2012-13 on revenue of Rs 15,697 crore. According to the annual report of the company, "it delayed repayment of certain dues to financial institutions, banks and debenture holders during the year. Delays including extensions in payments of Rs 3,320.8 crore and interest of Rs 2,387.9 crore have generally been regularised within 90 days from the respective due date."
What went wrong? Firdose A Vandrevala, executive vice-chairman at Essar Steel, says, "Two things happened with Essar Steel that put it in this situation: one was gas price and availability and the second was the timing of the integrated steel plant." Thus, gas availability has dropped over time to almost one-third of the amount committed by the government. And though the Hazira plant had come up early, the company could not build its slurry pipeline in Odisha between Dabuna and Paradeep due to regulatory hurdles. The company has a beneficiation plant in Dabuna where it converts low grade iron ore into high grade. And then it needs to send it through a 250 km slurry pipeline to its palletisation plant in Paradeep. Finally, those pellets are brought to Hazira in Gujarat through sea where they are fed into the steel plant.
But, like most other group companies, Essar Steel's problems seem to have bottomed out. "We are at an inflexion point; next year I think we should see at least doubling of production," says Vandrevala. The company is taking various measures including completing the slurry pipeline and connectivity to the national grid to reduce power costs, besides completion of its coke oven plant. On the financial side, it has come out of a corporate debt restructuring plan and in the last one year has dollarised its debt to the extent of $1 billion. According to the company's estimates, today it has Rs 29,000 crore of term debt; out of this, 77 per cent is in rupees, while the rest is in dollars. It wants to dollarise additional $2 billion in the next 6 months. This will convert about 63 per cent of its debt in dollars.