 "Essar pins hopes on oil share sale")
With a debt of Rs 88,000 crore, the Essar group is banking on Russian oil giant Rosneft to bail it out. The group announced early this year it would sell a 49 per cent stake in Essar Oil to Rosneft for $2.8 billion (Rs 18,900 crore), which would help it to bring down its debt by half in the current financial year.
The share purchase agreement with Rosneft will be signed by the end of this month and the transaction will close by September, say Essar executives. “The Rosneft deal will reduce the debt burden by half,” said V Ashok, chief financial officer of the group. With this transaction, Rosneft will take over half of Essar Oil’s Rs 20,000 crore debt, the Vadinar port, oil terminal, and Vadinar Power. The promoters had made equity contributions worth Rs 55,000 crore in its four operating companies, an Essar executive said.
Apart from selling a stake in Essar Oil, the group has sold an office complex in the Bandra Kurla Complex for Rs 2,400 crore and a residential complex in Bengaluru. The Ruia-promoted group sold its US-based business process outsourcing unit in July 2014 for $610 million. It also sold its 33 per cent stake in Vodafone Essar for $5 billion. All these funds were used by the group to repay bank loans and in equity contribution, say Essar executives.
In the past two years, the group’s operations have stabilised, say officials, adding there has been a significant growth in earnings and improvement in financial ratios across businesses. For example, its refinery capacity of 20 million tonnes has reached utilisation of refinery of over 110 per cent and has reported highest gross refinery margins among peers. Its power business portfolio of 4,675 Mw is operational and is now PAT (profit after tax)-positive, and its power capacity is set to go up to 6,100 Mw. The capacity of its port business will go up to 194 million tonnes by FY18 and has reported strong profitability with 78 per cent Ebitda margin, the company said.
The group’s debt to equity ratio is expected to improve from 1.87 in FY16 to 1.37 by FY17, while interest coverage ratio will go to 1.13 in FY16 to 2.05, indicating a marked improvement in its performance its operations, said a company official.
Essar executives admit the Reserve Bank of India’s scheme for stressed assets was a lifeline. The new norms will help group firm Essar Steel to convert half its loan as sustainable debt and rest as unsustainable. Banks have the option to convert the unsustainable loan into equity. While banks take a haircut on part B of the loan, it frees the company from repaying that portion. Infrastructure companies have also sought longer loan tenures and are waiting a clarification from the RBI.
Apart from the RBI scheme, the imposition of a minimum import price (MIP) by the government on steel has also come as a respite from dumping by China. “The steel plant is doing well and capacity utilisation is 70 per cent. The margins are about Rs 6,000-7,000 per tonne,” Ashok said. Essar Steel had net debt of Rs 31,000 crore in March and abandoned plans to sell a 30 per cent stake because it could not find bidders. Essar Oil is expecting to Ebitda (earnings before depreciation, interest, tax and amortisation) of Rs 10,000 crore in 2016-17 against Rs 7,000 crore in 2015-16.
Essar Steel had earlier blamed falling steel prices, lack of gas supply from the Krishna Godavari basin, and damage to its Kirandul-Vizag slurry pipeline by Naxalites for its woes. The lack of gas supply brought down the capacity of the company's Hazira plant to 40 per cent and was a Rs 4,500 crore hit on Essar Steel's finances. Besides, delays in environmental clearances for the company's second slurry pipeline in Odisha resulted in non-availability of pellets for the Hazira plant and this had an impact of another Rs 2,500 crore. The cancellation of a coal mine by the Supreme Court also impacted the Mahan power project, which re-started after the company began buying coal from Coal India.
Despite Essar’s efforts, some analysts are not convinced. “Even when the Vodafone deal with Essar took place, there was no material change in the group's debt. We need watch for actual reduction of debt following the Rosneft deal,” said Amit Tandon, founder and managing director of proxy advisory firm, Institutional Investor Advisory Services India.
The share purchase agreement with Rosneft will be signed by the end of this month and the transaction will close by September, say Essar executives. “The Rosneft deal will reduce the debt burden by half,” said V Ashok, chief financial officer of the group. With this transaction, Rosneft will take over half of Essar Oil’s Rs 20,000 crore debt, the Vadinar port, oil terminal, and Vadinar Power. The promoters had made equity contributions worth Rs 55,000 crore in its four operating companies, an Essar executive said.
Apart from selling a stake in Essar Oil, the group has sold an office complex in the Bandra Kurla Complex for Rs 2,400 crore and a residential complex in Bengaluru. The Ruia-promoted group sold its US-based business process outsourcing unit in July 2014 for $610 million. It also sold its 33 per cent stake in Vodafone Essar for $5 billion. All these funds were used by the group to repay bank loans and in equity contribution, say Essar executives.
In the past two years, the group’s operations have stabilised, say officials, adding there has been a significant growth in earnings and improvement in financial ratios across businesses. For example, its refinery capacity of 20 million tonnes has reached utilisation of refinery of over 110 per cent and has reported highest gross refinery margins among peers. Its power business portfolio of 4,675 Mw is operational and is now PAT (profit after tax)-positive, and its power capacity is set to go up to 6,100 Mw. The capacity of its port business will go up to 194 million tonnes by FY18 and has reported strong profitability with 78 per cent Ebitda margin, the company said.
The group’s debt to equity ratio is expected to improve from 1.87 in FY16 to 1.37 by FY17, while interest coverage ratio will go to 1.13 in FY16 to 2.05, indicating a marked improvement in its performance its operations, said a company official.
Essar executives admit the Reserve Bank of India’s scheme for stressed assets was a lifeline. The new norms will help group firm Essar Steel to convert half its loan as sustainable debt and rest as unsustainable. Banks have the option to convert the unsustainable loan into equity. While banks take a haircut on part B of the loan, it frees the company from repaying that portion. Infrastructure companies have also sought longer loan tenures and are waiting a clarification from the RBI.
Apart from the RBI scheme, the imposition of a minimum import price (MIP) by the government on steel has also come as a respite from dumping by China. “The steel plant is doing well and capacity utilisation is 70 per cent. The margins are about Rs 6,000-7,000 per tonne,” Ashok said. Essar Steel had net debt of Rs 31,000 crore in March and abandoned plans to sell a 30 per cent stake because it could not find bidders. Essar Oil is expecting to Ebitda (earnings before depreciation, interest, tax and amortisation) of Rs 10,000 crore in 2016-17 against Rs 7,000 crore in 2015-16.
Essar Steel had earlier blamed falling steel prices, lack of gas supply from the Krishna Godavari basin, and damage to its Kirandul-Vizag slurry pipeline by Naxalites for its woes. The lack of gas supply brought down the capacity of the company's Hazira plant to 40 per cent and was a Rs 4,500 crore hit on Essar Steel's finances. Besides, delays in environmental clearances for the company's second slurry pipeline in Odisha resulted in non-availability of pellets for the Hazira plant and this had an impact of another Rs 2,500 crore. The cancellation of a coal mine by the Supreme Court also impacted the Mahan power project, which re-started after the company began buying coal from Coal India.
Despite Essar’s efforts, some analysts are not convinced. “Even when the Vodafone deal with Essar took place, there was no material change in the group's debt. We need watch for actual reduction of debt following the Rosneft deal,” said Amit Tandon, founder and managing director of proxy advisory firm, Institutional Investor Advisory Services India.