 "Essar Steel aims to double Ebitda margins")
Ruia-owned Essar Steel has prepared a plan to double earnings before interest, taxes, depreciation and amortisation (Ebitda) margins at its domestic operations to 18-20 per cent in FY17, by way of reducing dependency on natural gas, a major input cost for the debt-laden company, and by capturing local demand, which has improved after curtailing of import.
“The plan is to lower costs by 30 per cent, by increasing production from our corex and blast furnaces which use coke, coal and in-house generated gas as feedstock, and reduce dependency on production from the sponge iron plant which uses natural gas as its feedstock,” director Jatindar Mehra said.
The company has burnt its figures in the past for relying heavily on natural gas as feedstock. More than half of its 10.2 million tonnes steel making capacity is idle due to non-availability of gas in the domestic market, amid high-priced imported gas. Essar Steel's domestic operations' capacity is 6.8 mt of a sponge iron unit, with 1.7 mt and 1.68 mt capacity of blast furnace and corex (a type of blast furnace), respectively.
“We will be increasing capacities at corex and the blast furnace to 2.2 mt and 2.5 mt, respectively, mainly via changing the processes to yield more steel production. Due to this, there will be no additional funds needed for this,” explained Mehra. Via this route, the company aims to take its capacity utilisation to 80-85 per cent in 2016-17 from 70 per cent at present.
Apart from operational issues, Essar Steel has also been dealing with high debt levels. This has worsened the situation for the company after a severe downturn in the industry, exacerbated by predatory pricing from China. As on end-March 2015, the company's standalone debt was about Rs 30,000 crore. To cut the burden, it has managed bring half its loan amount under the 5/25 scheme of the Reserve Bank of India (RBI) and the management is working to bring the balance, too, of debt under this. The scheme allows banks to extend long-term loans in the core and infrastructure industries sector to 20-25 years, to match the cash flow of projects, while refinancing these every five or seven years.
“In the past three years, the company has already made debt repayments worth Rs 20,000 crore, with the promoters and group companies infusing about Rs 14,000 crore, and the balance coming from the company's Ebitda (of the steel business), which has been eight to nine per cent,” said Mahadev Iyer, director (finance) and chief financial officer. “Our loan is a combination of rupee and dollar, and we are currently looking to bring the remaining 50 per cent (Rs 15,000 crore) under the 5/25 scheme.” The management said that despite a debt that high, the debt per tonne was Rs 30,000, largely in line with peers (see chart).
Essar Steel is also in the process of lowering its debt via sale of assets. It had planned to sell assets worth Rs 11,200 crore but this couldn't proceed after the Reserve Bank directive to ban sale and lease-back of assets. The company was planning to sell and lease-back its slurry pipelines and coke oven in the current financial year.
“Since the RBI guidelines do not give us the flexibility to lease-back, no selling of assets (worth Rs 7,200 crore) will take place,” said Mehra. Before the central bank guidelines, the company had managed to sell one of its assets, worth Rs 4,000 crore.
The situation for it was not too friendly until November last year. The Ruias had hired SBI Caps and ICICI Securities to sell stake. However, with the plan to bring itself on its own feet via a cost and debt reduction strategy, and with the business scenario in the domestic market improving, especially after imposition of minimum import price (MIP), the need for a strategic investor isn't being felt.
“To have a strategic investor is one of the options. In today's context, when the market has started to look up, to have one is not relevant. What the steel industry needs is more consideration from banks and rejigging of the balance sheet. Not a new investor,” said Mehra.
Domestic steel has been in a long battle with cheaper import from China since October 2014. Only recently did the government lend support via an MIP on 173 products, making about 15 percent of domestic demand vacant for local steel producers to capture. Prices have moved up significantly since then and a further rise is likely in the coming months. This is set to improve companies' revenue from the June quarter.
