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Minority shareholders have called the offer made by the Ruias to acquire 22 per cent stake from them in London-listed Essar Energy at 70 pence a share "opportunistic". The possible offer was at a premium of 4 pence to the closing price of 66 pence on the London Stock Exchange on 14 February (the day the offer was made), but that failed to impress the shareholders. That's because the worst is possibly behind the company and the move, as Standard Life Investments said, will deprive minority shareholders of the "substantial future upside in Essar Energy's valuation." The company, whose assets include the refinery and power businesses of Essar Oil and Essar Power respectively, had raised £1.3 billion in 2010 by listing its shares on the London Stock Exchange at 420 pence apiece, at the height of investor optimism for energy assets in India. Subsequently, the company went through a series of crisis that can be attributed to the economic slowdown, policy paralysis and the debt overhang, which have hammered the stock price to its current low levels.

One of the biggest blows came in January 2012 when the Supreme Court directed Essar Oil to pay INR 6,309 crore in sales tax to the Gujarat government, dismissing its plea seeking exemption for its Vadinar refinery. Essar Oil was originally granted sales tax deferment by Gujarat as an incentive after it agreed to build a refinery in the state in 1999. As the company was unable to meet the deadline for the refinery, the state revoked the exemption. The Vadinar refinery commenced operations in 2008 with a capacity of 10.5 million tonnes per annum. By March 2012, its capacity had been increased to 20 million tonne and its complexity upped significantly. (Higher complexity means that it can convert cheaper crude into valuable fuel output and thereby improve its operating margin.) But this cost the company about INR 10,000 crore.

The two factors together took Essar Oil's debt to INR 24,741 crore at the end of 2012-13 and its debt-equity ratio went haywire to 12.9. This proved a drag on its earnings. Thus, the company reported revenue of INR 25,131 crore for the December-ended quarter and EBITDA of INR 978 crore, but the interest payout was as huge as INR 812 crore. "In January 2012, everybody said in the western world that you can write off the refinery because of this," admits Lalit Kumar Gupta, managing director and CEO of Essar Oil.

Taking on the interest burden

It is this problem that Essar Oil plans to fix now by dollarising its debt. This will help it reduce the interest burden. The company couldn't do this earlier as it was under corporate debt restructuring. But now it has come out of it. The total debt on Essar Oil's books is INR 21,000 crore, or about $3.5 billion, of which about $900 million is already in dollars. It is planning to dollarise the rest in the next two quarters. "This will help us save 6 per cent interest cost; that is what we need to do and that is what we are working on," says Gupta.

Similarly, Essar Power (it has the capacity to generate up to 3910 Mw of electricity) also suffered after Essar Energy got listed in 2010. The company's gas-based plants could not run due to constraints in domestic gas supply and the high cost of imported gas. This affected the company's cash flows, which caused problems in servicing the debt which stood at INR 18,135 crore at the end of 2012-13. Consequently, Essar Power reported a loss of INR 175 crore in 2012-13 (on a revenue of INR 2,712 crore), though it had EBITDA of INR 1,359 crore. Now the company is working on renegotiating the debt which could push up maturities and signing new fuel agreements. Essar Power also plans to convert its plants at Hazira (515 Mw) and Bhander (500 Mw) to coal from gas. This has given investors hope that there could be an upside in Essar Energy's valuation.

Minority shareholders have called the offer made by the Ruias to acquire 22 per cent stake from them in London-listed Essar Energy at 70 pence a share "opportunistic". The possible offer was at a premium of 4 pence to the closing price of 66 pence on the London Stock Exchange on 14 February (the day the offer was made), but that failed to impress the shareholders. That's because the worst is possibly behind the company and the move, as Standard Life Investments said, will deprive minority shareholders of the "substantial future upside in Essar Energy's valuation." The company, whose assets include the refinery and power businesses of Essar Oil and Essar Power respectively, had raised £1.3 billion in 2010 by listing its shares on the London Stock Exchange at 420 pence apiece, at the height of investor optimism for energy assets in India. Subsequently, the company went through a series of crisis that can be attributed to the economic slowdown, policy paralysis and the debt overhang, which have hammered the stock price to its current low levels.

One of the biggest blows came in January 2012 when the Supreme Court directed Essar Oil to pay INR 6,309 crore in sales tax to the Gujarat government, dismissing its plea seeking exemption for its Vadinar refinery. Essar Oil was originally granted sales tax deferment by Gujarat as an incentive after it agreed to build a refinery in the state in 1999. As the company was unable to meet the deadline for the refinery, the state revoked the exemption. The Vadinar refinery commenced operations in 2008 with a capacity of 10.5 million tonnes per annum. By March 2012, its capacity had been increased to 20 million tonne and its complexity upped significantly. (Higher complexity means that it can convert cheaper crude into valuable fuel output and thereby improve its operating margin.) But this cost the company about INR 10,000 crore.

The two factors together took Essar Oil's debt to INR 24,741 crore at the end of 2012-13 and its debt-equity ratio went haywire to 12.9. This proved a drag on its earnings. Thus, the company reported revenue of INR 25,131 crore for the December-ended quarter and EBITDA of INR 978 crore, but the interest payout was as huge as INR 812 crore. "In January 2012, everybody said in the western world that you can write off the refinery because of this," admits Lalit Kumar Gupta, managing director and CEO of Essar Oil.

Taking on the interest burden

It is this problem that Essar Oil plans to fix now by dollarising its debt. This will help it reduce the interest burden. The company couldn't do this earlier as it was under corporate debt restructuring. But now it has come out of it. The total debt on Essar Oil's books is INR 21,000 crore, or about $3.5 billion, of which about $900 million is already in dollars. It is planning to dollarise the rest in the next two quarters. "This will help us save 6 per cent interest cost; that is what we need to do and that is what we are working on," says Gupta.

Similarly, Essar Power (it has the capacity to generate up to 3910 Mw of electricity) also suffered after Essar Energy got listed in 2010. The company's gas-based plants could not run due to constraints in domestic gas supply and the high cost of imported gas. This affected the company's cash flows, which caused problems in servicing the debt which stood at INR 18,135 crore at the end of 2012-13. Consequently, Essar Power reported a loss of INR 175 crore in 2012-13 (on a revenue of INR 2,712 crore), though it had EBITDA of INR 1,359 crore. Now the company is working on renegotiating the debt which could push up maturities and signing new fuel agreements. Essar Power also plans to convert its plants at Hazira (515 Mw) and Bhander (500 Mw) to coal from gas. This has given investors hope that there could be an upside in Essar Energy's valuation.

THE WRONG CALL ON TIMING?

Amongst all Essar companies, Essar Steel had the highest individual debt of INR 35,180 crore in 2012-13, with a debt equity ratio of 5.38. The company reported a loss of INR 4,980 crore in 2012-13 on revenue of INR 15,697 crore. According to the annual report of the company, "it delayed repayment of certain dues to financial institutions, banks and debenture holders during the year. Delays including extensions in payments of INR 3,320.8 crore and interest of INR 2,387.9 crore have generally been regularised within 90 days from the respective due date."

What went wrong? Firdose A Vandrevala, executive vice-chairman at Essar Steel, says, "Two things happened with Essar Steel that put it in this situation: one was gas price and availability and the second was the timing of the integrated steel plant." Thus, gas availability has dropped over time to almost one-third of the amount committed by the government. And though the Hazira plant had come up early, the company could not build its slurry pipeline in Odisha between Dabuna and Paradeep due to regulatory hurdles. The company has a beneficiation plant in Dabuna where it converts low grade iron ore into high grade. And then it needs to send it through a 250 km slurry pipeline to its palletisation plant in Paradeep. Finally, those pellets are brought to Hazira in Gujarat through sea where they are fed into the steel plant.

But, like most other group companies, Essar Steel's problems seem to have bottomed out. "We are at an inflexion point; next year I think we should see at least doubling of production," says Vandrevala. The company is taking various measures including completing the slurry pipeline and connectivity to the national grid to reduce power costs, besides completion of its coke oven plant. On the financial side, it has come out of a corporate debt restructuring plan and in the last one year has dollarised its debt to the extent of $1 billion. According to the company's estimates, today it has INR 29,000 crore of term debt; out of this, 77 per cent is in rupees, while the rest is in dollars. It wants to dollarise additional $2 billion in the next 6 months. This will convert about 63 per cent of its debt in dollars.

Source-On Request