Essar Steel Debt Being Restructured, No Plan To Exit Steel: Prashant Ruia
Essar Group has no plans to sell any other business, says Prashant Ruia.
The Essar Group-Rosneft PJSC deal was the biggest foreign direct investment (FDI) deal in 2016, with the Russian petrochemical giant and two other foreign players agreeing to buy 98 percent in Essar Oil Ltd. for around $13 billion. This sudden gush of funds gave the debt-laden Essar Group a massive breather.
Chief Executive Officer Prashant Ruia told BloombergQuint’s Menaka Doshi on the sidelines of the 47th World Economic Forum at Davos that this will go a long way in helping the group to bring down its debt from Rs 88,000 crore to Rs 50,000 crore. Ruia insisted though, that the deal was not done on under any compulsion from the lenders.
Here are edited excerpts from the interview.
Almost all of Essar’s Oil business was sold to Rosneft. Was it a strategic exit? Was it exit borne out of the fact that the group had large amount of debt and that you needed to find ways to pay that debt off?
I think, as a group one of our philosophies has been to build businesses from scratch. And that is something which we have done over the last two or three decades and once we have built it, once it has matured and started generating cash flows and the growth which we expect when we make these investments, we look at monetising every opportunity. We felt that the value we got from Essar Oil was good, was positive. We were happy with that and we felt that this was the right time for us to monetise these assets, something similar to what we did when we built the telecom business from scratch and finally exited to Vodafone about 5-6 years ago. So it’s a similar kind of thing that is what we believe we are good at. And that is what we did.
What exactly is this value which you are talking about because we still haven’t been able to figure out what the per share price is. We would like to know what you sold per share and also because you have standing instructions from SEBI that any differential between this price and what your delisting price was to be paid off to whatever the remaining shareholders are.
We haven’t yet got to the per share price number because we would get to that at the time of closing. However, the enterprise value of the transaction is $12.9 billion. That figure is already in the public domain. By the time of closing which is not very far away now, we will arrive at the final equity price per share because there are many adjustments from the enterprise value down to the equity price. However, we have already come out to say there will be a higher price which will be paid to the minority shareholders. Just to add two or three things which some people may not be fully aware of, if you look at the Essar Oil delisting process, when we kicked off the process the share was around Rs. 90. In fact little less than Rs. 90. By the time we actually delisted it was around Rs. 262. So there was a significant premium or uplift which the shareholders got at the time of delisting. And as we have said there will be a further payout when the deal closes.
Any approximation on the share price.
For the first time, a company is going to reward its shareholders even after delisting. There have been many delistings over the last 20 years but this is going to be the first time that shareholders are going to benefit from a deal which is happening post the delisting transaction. I think it was something we suggested because we wanted to ensure that all the shareholders of the company get a fair return.
Is it a substantially higher amount?
The price which we are finally going to close the deal as I have said will be more then Rs. 262. It will be the same price which we will get as the majority shareholder and the minority. So it’s the same price. And the reason the price is not going to be significantly higher is because a lot of them already got built in to the share price in the run up to the delisting. So it was merely a 300 percent run up from Rs. 90 to Rs. 260. So a lot of that premium has to an extent been built in and whatever will be left of that will be obviously shred when the deal closes.
You said this was part of your strategy to monetise assets and not done under any pressure from the lenders?
No. It wasn’t done under lender pressure. We have been very clear that this has been from our perspective. A large part of the funds which we will get from the monetisation will be used to deleverage the group. We believe that this from our perspective it is really one of the largest deleveraging exercises ever done in Indian corporate history. We are going to deleverage about $10 billion. $5 billion of that will be at the operating company level and the another $5 billion at the holding company level. I am sure this is one of the spin off benefits of this transaction. But certainly it wasn’t the prime reason for doing the transaction.
You have an upstream business in India, Coal Bed Methane or CBM. You have a refinery in the U.K., the Stanlow refinery which you acquired few years ago. Are you going to stay invested in these business or are you looking to exit the oil and gas business altogether?
So basically the way we have looked at it is we have principally monetised Essar Oil. That entails the Indian refinery and retail arm where we have built more than 3,000 outlets in India, which is all part of that company. We are not exiting any of the other business. To give it perspective, Essar Oil, as part of the Essar Group is 25 percent in terms of contribution to the group. So yes, it is a significant piece, significant part of the group. But we still have a lot of other businesses which we are going to concentrate on.
But why hold on to the CBM? Why hold on to the Stanlow refinery when you are getting out of what was your most valuable asset in this stream of business?
Because we see a huge amount of growth in the energy business (E&P). We are the largest player in Coal Bed Methane and the next big thing in India, hopefully, will be shale gas. So there is a lot of opportunity in the E&P which we certainly would like to focus on. As far as the refinery in the U.K. is concerned, it has a 14-15 percent market share in the country. It’s a very significant part of the U.K. oil piece and the company is doing very well. Refining business is generally doing very well. We think there is lot of growth potential. We have recently made a retail foray in the U.K. We currently have 27 retail outlets and are growing them to about 400 over the next 2-3 years. We feel there is still a lot of growth opportunity in that business and we are upgrading the refinery. We are investing nearly $200 million in capex to upgrade the refinery.
No plan to exit those businesses any time soon?
No. I think from our monetisation perspective, once we have completed the Essar Oil deal, we are pretty much done. From a group perspective at least there is nothing on the table right now.
How much debt will you have at a group level after the deal with Rosneft is complete?
Rs 50,000 crore.
You will have Rs 50,000 crore leftover? And most of it can be ascribed to your steel business?
Steel and power business. And then we have got many other businesses which are not looked at.
Steel was really in a tough spot a year and a half ago. The commodity cycles improved. The protectionist measures from the Indian government to protect the dumping by Chinese companies have also helped. How is your steel business faring right now? Last we heard you were looking at a restructuring. What is going on?
Steel is a cyclical business and every time we go through a down cycle…Unfortunately in the steel industry the down cycles are fairly severe and this time around it was driven primarily by the huge Chinese exports which basically came out of the fact that their own domestic consumption came down. And since they produced 50 percent of the world steel, when they start exporting huge quantities at very very low prices it had a huge impact on the steel industry as a whole. The whole industry went through a very difficult patch last year because of this. It wasn’t just India which has taken protectionist measures. If you look at the world today, the U.S., Europe, South America...its the same story. U.S. protection for the steel industry is significantly more than what it is in India.
I mean it in a complementary way because the word has been bashed around a lot lately.
No, it was required. It was unfair, what was happening. It was dumping at a level that we had not seen before. So, the government took the right steps. Before, we come to restructuring, from a business perspective, we are currently operating at 85 percent capacity. We believe its the most modern and most efficient steel plants in the country. Our margins will be in line with our peers in the integrated steel plant companies and more importantly what Essar Steel suffered from in a 2-3-year period was most of the natural resources which were assigned to them were cut off. It happened because of government and Supreme Court’s orders. Natural gas which is our primary source of fuel and energy got disconnected. But now that the oil prices have corrected globally, we are able to buy natural gas and run the plants at full capacity. So, the company is now running and the operating margins and operating revenues are pretty much in line with projections. Coming to restructuring, clearly there was a period of 2-3 years when the company’s operations got hurt, and we were literally operating at 20-30 percent of our capacity because we did not have any fuel. We took on extra debt during that period and we invested a lot on equity. We invested close to Rs 18,000 crore of equity in the company. Debt in steel is Rs 40,000 crore. And that Rs 40,000 crore is slightly more than what we had originally projected. We are trying to do as part our restructuring and in next 2-3 months.
Is it under S4A framework?
I am not sure which scheme its going to finally go under.
There is only one scheme as CDR is now closed.
No, there are a few options now that banks are considering. Currently, the way S4A is designed, not many companies are falling for it.
HCC Ltd. has done it?
Which didn’t have any term debt.
Is there a twist there?
No. The way the guidelines are formulated, not too many companies which need restructuring are falling into the categories.
Can you at least tell us about the modalities of the restructuring?
I don’t want to specifically get into the restructuring scheme as its not finalised yet. I do believe its going to happen over the next few weeks and the moment we at a point where we are ready to share the details, I will be more than happy to share it. This is a company which has invested Rs 50,000-60,000 crore in terms of assets. It’s a 10 million company. It’s going to be 15 percent of Indian market.
If you get a great offer, are you likely to exit from Essar Steel? There was a rumour that it was on the block.
That’s why it was a rumour. From the group’s perspective, monetisation is pretty much done. It’s a big deal what we have done and we don’t feel any need to do anything else right now. And from a deleveraging perspective, whatever needed to be done, I think we have done. Frankly, we are looking at growth in the rest of the businesses. We have ports. We are India’s second largest private sector port operator, we are in power; we have 6,000 Megawatts of power. We have steel business and we continue in the oil and gas business and we continue to invest in the services business whether it is the BPOs or other spaces connected to that, we continue to look at it seriously.
You are not going to sell Essar Steel in 2018?
No.
This business has recovered and revived and now the energy business, not just yours but everywhere across the country, It’s suffering from excess capacity, not much offtake, not the right kind of modernisation though there schemes have been promising. The UDAY scheme has been pretty promising start up but we are not seeing much reforms from the states’ point of view. What’s your take on how the energy sector will look in the course of the year?
Power was suffering from 2 or 3 issues. Couple of them have gotten resolved and one has not yet. The one that has gotten resolved is fuel, which was primarily coal. And that’s now freely available. Coal India Ltd. is doing pretty well. There is sufficient coal available. Second, the cost of coal has come down which has made the industry pretty competitive. The third is the discom reform and demand. The actual demand for power hasn’t picked up the way we had expected. India has spent a lot in building a large amount of capacity whether it is coal based plants or gas based plants, it doesn’t matter. Huge amount of capacity has come in line in the last 2-3 year. And the demand hasn’t grown in the same rate and that’s why today the spot prices in the grid is 2.5 rupee per unit. So that’s the third piece which we hope because of the UDAY scheme, and of the general growth that we expecting this year should deliver and in long term it come.
How much debt do you have in your power business?
Maybe around Rs 17,000 crore on our business that includes working capital.
Do you see not only your power business but others as well go through the same problems from a leverage point of view, as well as the steel business in the next 12 months or so?
Leverage is a problem if assets aren’t delivering.
If you have no demand therefore no offtake of power?
Offtake of power is on two accounts. One, many plants came with Power Purchase Agreements (PPA) so they are able to sell their power against the PPA. Then there are some PPAs but there aren’t lifting power, that’s an issue. If there are no PPAs, there is a problem.
There is no great investment happening in the thermal power or gas-based power space. Investment is happening currently in the renewable space. Even in renewable, if you see the size and scale in the other two spaces, its small. Yes, they are talking about 10-15,000 megawatts a year. We built 1,00,000 megawatts in the thermal and gas based power plants over the last three years. There is no new investment that is coming and the new investment that is coming will get absorbed in the system. We are certainly looking at solar. In Any case there is a minimum requirement now.
Things were looking a little better last year but demonetisation, the jury is out on that. No business leader wants to comment on it.
We need to focus on bringing back private investments in the system, and job creation. These are the two things that need to kick in. We have seen significant growth in the consumer end of the sector, so any consumer related business has seen growth this year, last year but investments related to that are fairly small. But that’s happening and its happening at double digit level growth. We haven’t seen from the infrastructure end but I still think we have time. All the earlier investment needs to be absorbed before the next cycle kicks in.
We have seen substantial cut in rates over the last few months and now there is a clamour that there might be a fiscal stimulus coming in the next Budget.
There has been significant cut in rates but I am not sure if it has fully transmitted into the industry. There has been a big gap in actual transmission. It’s happening but not as rapidly as it should, And that will hopefully stimulate demand and that will help in absorbing surplus capacity that is currently available which will lead to a new investment cycle. That’s what’s going to happen, and that’s going to take time.
Fiscal stimulus in the Budget, that’s what you are betting on?
I think the government is seriously looking at kick starting the economy. And interest rates are very important from my viewpoint. And their own investments through public sectors and their own schemes. If we get some stimulus, then it would help.
It’s going to be a year of uncertainty? Every one has been talking about Trump, Brexit, not sure where China is going to land?
Looking selfishly from business perspective, people in the U.S. are very positive. It is looking a lot better than what it did a year ago. In terms of growth, jobs, in terms of sectors which got a little alienated in terms of manufacturing in the U.S., so all those are positives. If you talk to any American businessman here, you will get a positive feedback of what he can do otherwise. From the European and U.K perspective, they have seen a great depreciation in their currency. In the last 3-4 months, they have witnessed depreciation of more than 20 percent in the Euro and pound and that’s very good for them from a growth perspective because they will be a lot more competitive now.