Business Standard

Essar Group takes baby steps to cut debt burden

Clarity on its talks to refinance loans for Essar Oil, Steel, Shipping and Ports will emerge in a month or two

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With a combined debt of close to Rs 80,000 crore, the companies like Essar Oil, Essar Steel, and are now finding ways to lower their debt burdens.

The companies have been reiterating that lowering debt is a major focus area and every step and action is being pursued in this direction. Out of this total debt, and have got the RBI’s approval to raise upto Rs 8,250 crore and Rs 2,365 crore in ECBs, respectively. The company spokesperson said, “As a policy, we do not comment on any specific transaction. However, we would like to add that the Essar Group continues to work on reducing the cost of debt across all its businesses so as to align its financing costs with global levels.”

As regards Essar Steel and Essar Oil, the capacity expansions have been completed. The companies are large exporters and, as such, availing dollar financing acts as a natural hedge with reduced interest costs and increased tenure, making the companies globally competitive. Essar spokesperson said, “As such, these efforts are neither driven by any compulsion to refinance or restructure but by the strategy of pruning financing cost as much as possible.”

LK Gupta, managing director, Essar Oil, in an interview with Business Standard in June this year had said that with the 20 million tonne Vadinar refinery getting complete this year revenues for the company will shoot up and refinancing of loans will not be an issue. The company back then was reeling under the Rs 6000 crore sales tax notice from the Gujarat government and trying to come out of the CDR programme.

In the quarter gone by, Essar Oil successfully came out of the CDR programme and said that it may raise close to Rs 8,250 crore after it got the RBI’s approval to do so. It is looking to raise more money overseas to rework its debt.

The even reported a net profit of Rs 166 crore in the second quarter after successive losses and the Vadinar refinery boosted its gross revenues by a mammoth 67 per cent. It said, “The phase I of the optimisation project was completed last quarter four months ahead of its planned completion. During the quarter, Vadinar Refinery processed 5.07 MMT of crude, up 66% over Q2FY12. The refinery is now functioning at full capacity of 20 MMTPA with all units stabilized.”

Essar Oil had net sales of Rs 58,000 crore in FY12 and the Vadinar refinery has already started to show good results.

Essar Steel, too, has a debt of Rs 23,500 crore and is actively scouting for opportunities to lower this number. The company has been exploring the options to borrow money from overseas as the interest rates in developed markets are lower than India. The company has even got the approval of the Reserve Bank of India (RBI) to refinance upto Rs 2,365 crore in foreign currency.

The doubling of capacity to 10 million tonne has been complete and the company hopes to achieve 7 million tonne production mark by the end of the current fiscal.

With the increase in its steel production, the company is hoping to service the high interest costs sitting on its books for the Rs 37,500 crore spent on the expansion plans.

The spokesperson said, “The swapping of rupee debt with foreign debt is a beginning towards  achieving this and the has  permitted Essar Steel and Essar Oil, which have significant export potential, to avail dollar financing and repay rupee debt. This strategy will align the balance sheet to the currency of our business i.e US dollars.”

Essar Shipping, which has a debt of Rs 5,500 crore, at the end of September 30, 2012 is also actively looking to lower its debt burden. AR Ramakrishnan, Managing Director, Essar Shipping Ltd in a recent conference call with the media had told this newspaper that the company is indeed locked-in with lenders abroad to convert its rupee loans into dollar denominations and are even trying to extend the time period to repay the existing loans.

He said that over the next month or two the company will have more clarity on the loan refinancing.

Essar Shipping is also looking to redo loans on some of its ships, Ramakrishnan said. He, however, did not put a number on how much loan the company is looking to rework and said that it solely depends on the lenders and the economic outlook. “This is a priority for us,” he reiterated.

Essar Ports, with its Rs 5601 crore loan has knocked on the doors of the RBI to allow the company to raise Rs 1500 through the External Commercial Borrowings (ECBs) as a special case to refinance its loans.

RBI has allowed manufacturing and infrastructure companies to avail ECBs to repay their rupee loans if the companies have been a consistent foreign exchange earner for the last three years.

Even though Essar Ports earns its entire revenues in rupees it has made a special appeal to the RBI in this regard.

The company has already availed of the Take Out Financing scheme of the government through IIFCL and refinances Rs 405 crore of its debt for the Hazira port facility. This has brought down its interest cost by 2.65 per cent for the stated amount. The company is also looking to refinance close to Rs 250 crore at its Vadinar terminal through this Take-Out finance route as well.

Essar Ports is increasing its capacities to 158 million tonne by 2014-15 from the current 88 million tonne and its net profit for the second quarter of this fiscal jumped 97 per cent because of the increased business from group companies like Essar Oil and Essar Steel.

This business will continue to grow and with its own capacity additions, Essar Ports is looking to get at least 25 per cent of its revenues from third party cargo by 2014-15 as against a meagre 4 per cent currently.

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