The sale of Essar Oil is quite significant for the Indian banking system as the Rs 85,000-crore deal may release Rs 45,000 crore cash for Essar Group and help in deleveraging, says a report.
According to Kotak Institutional Equities, the sale of Essar Group's 'entire' holding in Essar Oil and Vadinar port to Rosneft, Trifugra and UCP will allay the market's concerns about Indian banks' exposure to Essar Group.
"The Rs 850 billion transaction will release Rs 450 billion of cash (our estimate) for Essar Group, which can be potentially used to repay debt of Rs 235 billion in Essar Global Holdings and reduce debt in financially stressed entities such as Essar Steel and Essar Power," Kotak Institutional Equities said in a research note.
According to the report, Indian banks have large exposure to Essar Group and following this deal their exposure may reduce significantly.
"We view the 98 per cent stake sale in Essar Oil and 100 per cent stake in Vadinar port by the Essar Group for a total consideration of Rs 850 billion (all-cash deal) as a very significant event for the Indian banking sector," the report said.
The report noted that the combined and coordinated efforts of the Indian government, RBI and banks will likely result in manageable levels of loss-given default (LGD) despite likely high NPLs in the country's banking system.
"Essar Group has total debt of Rs 1.3-1.4 trillion, with most of it raised from Indian banks. We note that, VTB, a Russian bank, will finance around Rs 260 billion of Essar Oil's debt (Rs 315 billion as per FY2015 annual report) as part of the deal, which will further reduce Indian banks' exposure to Essar Group," it said.
Meanwhile, Essar Group Director Prashant Ruia has said that that "we plan to utilise proceeds from the stake sale to deleverage the Group and pave the way for strategic consolidation and growth in other businesses. Deal will help Essar deleverage almost 50 per cent of its Rs 88,000 crore debt and substantially reduce interest costs.
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