Essar Steel to convert rupee debt into $ by June

Dollarisation of rupee loan will halve interest cost from 12-13% to 6-7% and result in interest saving of about Rs 1,200 cr annually

 

To cut the risk to its balance sheet, Essar Steel, the Essar Group’s flagship company, plans to complete the conversion of its remaining $2-billion rupee loans into dollar ones by June, improving cash flows.

“We are in advanced stage to dollarise the balance $2-billion rupee loan, which will not just reduce our interest burden but also stretch the repayment tenure by about four years,” said Director (finance) and Chief Financial Officer Mahadev Iyer. “Dollarisation of the $2-billion rupee loan will halve the interest cost from 12-13 per cent to six-seven per cent and result in interest saving of about Rs 1,200 crore annually.”

“The tenure for repayment of the loan, which is six years, will stretch to10 years after dollarisation and this will put us in a comfortable position in terms of cash flow,” he added.

In June 2013, the company had raised $1 billion through external commercial borrowings to repay part of its rupee-denominated debt, which shielded it from exchange-rate fluctuations and helped save about Rs 450 crore on interest costs. As of December 2013, unlisted Essar Steel had a debt burden of Rs 29,000 crore, while its parent group’s group stood at about $12 billion.

A dollar loan is a natural hedge for companies that have dollar inflows. Since 25 per cent of Essar Steel’s total revenue is accounted for by exports, a dollar loan isn’t viable for the company.

On the operational front, Essar Steel plans to return to profitability this financial year. At the end of 2012-13, the company reported an operating loss of Rs 1,652 crore on a consolidated basis; it also reported a net loss of Rs 4,980 crore, according to Capitaline Plus data.

Essar Steel plans to increase the share of revenue from exports to up to 30 per cent. It also aims to target niche markets that require value-added products, which come at a premium price to standard products.

As of March-end, the company’s consolidated revenue was Rs 17,702 crore.

“Our value-added products such as colour coated steel and galvanised steel will help us generate higher revenue this year,” said chief executive and Managing Director Dilip Oommen. “We aim to be profitable by the end of this financial year,” he added.

At the expenditure level, Essar Steel plans to reduce power costs by switching from costly gas-based supply to the national grid, which is coal-based. The company will also assure an uninterrupted supply of raw material, as its slurry pipeline in Visakhapatnam has been fixed. Essar Steel runs a Kirandul-Visakhapatnam pipeline, which transports iron ore in slurry form from its Chhattisgarh mine to its eight-million-tonne pelletisation plant in Visakhapatnam. The pipeline was attacked by Naxals in October 2011, which crippled operations at its pellet plant.

“The slurry pipeline has now been fixed and we have no issues there. We are using a combination of security and corporate social responsibility initiatives to maintain a peaceful working environment in the region,” Oommen said.

The company also has a six-million-tonne pellet plant at Paradip. The Visakhapatnam and Paradip plants provide raw material to the company’s 10-million-tonne steel plant at Hazira. “Currently, average capacity utilisation at the 10-million-tonne plant is about 40 per cent. We plan to raise this to about 80 per cent this financial year,” said Iyer.