The Essar group has drawn a plan to revive the financial metrics of Essar Steel, its struggling steel business, through sale of assets worth Rs 11,200 crore by March next year. Besides, the promoters will infuse another Rs 1,500 crore into the company which will be used for repaying lenders.
The group's asset-sale plan is exclusive of the London-based holding company's plans to sell a 49 per cent stake in Essar Oil to Russian oil giant, Rosneft, in an all-cash deal worth $2.8 billion, for bringing down its debt.
The group's aggression in bringing down the debt of Essar Steel stems from the fact that rating agencies have downgraded its Rs 30,500-crore debt into default category, causing some worry among its bankers, which have asked Ruias, the promoters of the group, to expedite their asset-sale plan.
Top company officials said Essar Steel was facing the brunt of falling steel prices, lack of gas supply from the Krishna-Godavari basin and damage to its Kirandul-Vizag slurry pipeline by Naxals in October 2011. The lack of gas supply brought down the capacity of the company's Hazira plant to 40 per cent and caused a Rs 4,500-crore hit on Essar Steel's finances. Besides, delays in getting environmental clearance for the company's second slurry pipeline in Odisha resulted in non-availability of pellets for the ramp-up of the Hazira steel plant and had an impact of another Rs 2,500 crore on the company.
Essar Steel is not alone. All Indian steel companies, including the big ones like Steel Authority of India, Tata Steel, JSPL and JSW Steel, have been going through a difficult phase due to cancellation of coal mines, falling steel prices and dumping of cheap Chinese steel until recently.
The company had also frozen all new appointments till the steel sector turned around, they added. All these steps, according to company officials, will help bring down debt from banks and fund last-mile capital expenditure. "During the past three years, the promoters contributed Rs 8,000 crore as equity into the company. They plan to infuse an additional equity of Rs 1,500 crore in 2015-16. Most of the legacy issues are now resolved and the projects are now complete. We will see an impact on our operations and financials in the next two-three quarters," said Firdose Vandrevala, executive vice-chairman, Essar Steel. An anti-dumping duty had helped steel companies reclaim the domestic market from cheap Chinese imports; demand for their products had remained robust within India, he said.
During the past three years, Vandrevala said, banks had been repaid to the tune of around Rs 20,000 crore out of the promoters' equity support of Rs 8,300 crore, besides the company's own earnings before Interest, tax and amortisation (Ebitda) of Rs 8,500 crore.
He added that the company would ramp up its capacity utilisation with infusion of additional working capital from bankers, given that the challenges had now been resolved. Higher top and bottom lines going forward are expected to meet the debt-servicing obligations in full. Banks continue to lend to and support the company in the form of additional working capital, refinancing under the Reserve Bank of India's 5/25 scheme, and approval for monetisation.
At present, Essar Steel was the only company in the group that was facing headwinds due to global economic conditions. The other group companies - Essar Oil, Essar Port and Essar Services - had healthy financial metrics and had been repaying debt on time, said a group official.