Essar Oil sale to reduce group revenue by 80%

Ruias to now focus on steel, power and ports

The Essar group's decision to sell 98 per cent stake in its oil entity and related infrastructure will majorly impact its ranking by assets and revenue.

In 2014-15, the group was ranked fourth among India’s top business houses, between the Aditya Birla and Mahindra groups, with revenue of Rs 1.06 lakh crore.

The Essar group's rank would come down to 24th as its revenue would drop to Rs 20,000 crore after Essar Oil's sale. Essar has not disclosed financials for FY16 for all its companies and so the latest position is not known.

The refining business has been highly profitable for most players, and for Essar. For the group, oil has been a leader, bringing 80 per cent of both revenue and net profit. While the sale will bring much-wanted funds for the group to repay debt, the sale of the oil business makes the group’s financial position weaker.

It will now be left with Essar Steel, Essar Power and Essar Shipping, beside ports and the business process outsourcing (Aegis) businesses, and the Stanlow refinery in Britain. The global slowdown and low demand have meant steel, shipping and ports are struggling businesses for all, including Essar.

On Saturday, the group sold its stake in Essar Oil, the Vadinar (Guajarat) terminal and power assets to Russian oil major Rosneft, commodity trading firm Trafigura and Russian investment fund United Capital Partners.

 

Effect
Essar Oil was a cash cow for the group and analysts expect it to have earned substantial profits. Sources say it had earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 7,000 crore in FY16, expected to be Rs 10,000 crore in FY17.

The group, however, counters this. It says divestment of Essar Oil is part of a long-term strategy to monetise assets and to use the proceeds to grow other group businesses, such as steel, power, ports and shipping.

"We have an established strategy of setting up new businesses, scaling these up to global level and then monetising them. In the past, we did a similar thing with our telecom venture and BPO business; now, we are doing it with Essar Oil," said Prashant Ruia, group director, in an interview with Business Standard.

The group will be able to reduce debt from the sale of these assets. Its companies have a combined gross debt of Rs 88,000 crore, nearly a third of which is accounted for by Essar Oil, says a spokesperson. Beside, the holding entity, Essar Global, has debt of $4.5 billion (Rs 30,000 crore) in international markets.

Proceeds from the Essar Oil sale will result in repaying $4.5 bn of foreign debt and another Rs 45,000 crore in the Indian arms, most of it in Essar Oil. There will not be any major reduction in debt of Essar Steel or Essar Shipping; however, the group’s loan situation will improve, as over half its debt will be repaid.

In FY15, Essar Oil had net sales of Rs 87,064 crore and net profit of Rs 1,521 crore. In comparison, group companies reported combined revenue and net profit of Rs 1.06 lakh crore and Rs 1,812 crore.

Ahead
However, Ruia downplayed the importance of Essar Oil’s contribution to group turnover. "Revenue is not the right way to look at (this) contribution, given the role of oil prices in the revenue of refiners. Essar Oil’s contribution to group assets and Ebitda is around a third, and smaller than what its revenue suggests," he added. The divestment will reduce the group's consolidated assets by around a third, he said.

Ruia stated the worst was now behind at Essar Steel, which will now become the group’s largest business in terms of revenue, profit and assets. “The business is now Ebitda-positive and our production volume was up nearly 50 per cent during the first half of FY17.”

In FY15, Essar Steel accounted for nearly half the group’s combined gross debt, around a seventh of the group’s net sales and 37 per cent of all group assets. It generated Ebitda of Rs 6,000 crore in FY15, against group Ebitda of Rs 13,290 crore. In the same year, Essar Oil accounted for 37 per cent of group companies’ combined assets and 36 per cent of their combined Ebitda.

Ruia also expects steady growth in the power and port business, given a turnaround in the economy. Analysts share the optimism but say the group faces headwinds in the short term, given the operational problems in infrastructure and capital-intensive businesses.

Capital need
"Steel and ports have big growth potential in the long term, given India's infrastructural requirements. However, they will require substantial investment to attain global scale," said G Chokkalingam, chief executive at Equinomics Research & Advisory.

In FY15, Essar Steel and Essar Ports together accounted for 44 per cent of the group's combined assets.

"Unlike other large family-owned business groups, Essar doesn't have a significant cash-rich and asset-light business in its portfolio. It has capital-intensive businesses, making them financially vulnerable during an economic downturn," added Chokkalingam.

Ruia said proceeds from the sale of Essar Oil would more than take care of the group’s funding requirement in the near to medium term. “The deal will halve the group debt at the level of operating companies, while the holding company will be nearly debt-free, post the deal. This will greatly improve our financial flexibility in funding the growth of other businesses,” he adds.