The sale of Essar Oil, the Vadinar Port and power assets to Russian oil major Rosneft, commodity trading firm Trafigura and Russian investment fund United Capital Partners will result in a significant drop in the Essar group's revenue.
While the group has not disclosed the financials for FY16 or projections for FY17, going by 2014-15 data, Essar Oil accounted for around 80 per cent of the group's combined revenues and profits.
After the sale, Essar group will be left with Essar Steel, Essar Power, Essar Shipping, besides ports, business process outsourcing (Aegis) businesses and the Stanlow refinery in the UK.
Essar Oil was a cash cow and analysts expect it to have earned substantial profits for the group. Sources say it had earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 7,000 crore in FY16, and was expected to be Rs 10,000 crore in FY17.
The group, however, has countered this saying the divestment was part of a long-term strategy to monetise assets and use the proceeds to grow other group businesses such as steel, power, ports and shipping. "We have a long-established strategy of setting up new businesses, scaling them up to global level and then monetising them. In the past, we did a similar thing with our telecom venture and BPO business and 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 its debt from the sale of these assets. Essar group companies have a combined gross debt of around Rs 88,000 crore currently, around a third of which is accounted for by Essar Oil, according to a spokesperson of the group. Besides that, the holding firm Essar Global has debt of $4.5 billion (Rs 30,000 crore) in international markets.
The proceeds from the sale will result in repaying $4.5 billion of foreign debt and another Rs 40,000 crore of debt in the Indian arms, most of which will be in Essar Oil. There will not be any major reduction in debt of Essar Steel or Essar Shipping, but the group's debt situation will improve as over half of the group's debt will be repaid.
In FY15, Essar Oil had net sales of Rs 87,064 crore and net profit of Rs 1,521.5 crore. In comparison, the group companies reported combined revenues and net profit of Rs 1.06 lakh crore and Rs 1,812 crore in FY15.
However, Ruia downplayed the importance of Essar Oil's contribution to group turnover. "Revenues are not the right way to look at Essar Oil's contribution to the group, given the role of oil prices in the revenues of refiners. Essar Oil's contribution to group assets and Ebitda (operating profit) is around a third and smaller than what its revenues suggests," he added. The divestment of Essar Oil will reduce the group's consolidated assets by around a third, he said.
Ruia said the worst was behind Essar Steel, which will now become the group's largest business in terms of revenues, profits and assets. "The business is now Ebitda positive and our production volume was up about 50 per cent during the first half of FY17." In FY15, Essar Steel accounted for around half of the group's combined gross debt, around a fifth of the group's net sales and 37 per cent of all group assets. It generated an Ebitda of Rs 6,000 crore in FY15, against group level Ebitda of Rs 13,290 crore.
In the same year, Essar Oil accounted for around 37 per cent of the group companies' combined assets and around 36 per cent of their combined Ebitda.
Ruia also expects a steady growth in the group's power and port businesses, given the turnaround in the economy.
Analysts share the optimism, but say that the group faces headwinds in the short term, given the operational problems currently faced by infrastructure and capital intensive businesses.
"Steel and ports have big growth potential in the long term, given India's infrastructural requirements. But they will require substantial investment to attain global scale," said G Chokkalingam, founder & CEO, Equonomics 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, which makes it financially vulnerable during an economic downturn," added Chokkalingam.
Ruia said the 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 nearly halve the group debt at the level of operating companies, while the holding company will be nearly debt-free after the deal. This will greatly improve our financial flexibility in funding the growth of other businesses."