Rubbishing the talk around the debt burden prompting the company to sell 49 percent stake in Essar Oil to Rosneft, Essar Group Chief Executive Prashant Ruia said that regulatory troubles raised debt concerns.
“I do believe that many of those issues have been addressed and from a group perspective, we have once again demonstrated our ability to build projects despite all the problems one faces in the Indian context, grow these businesses, create value and then monetise at the right time,” Ruia told CNBC-TV18.
Spelling out plans for Essar Steel, Ruia said that problems regarding project completion are behind the company and Essar Steel plant is now operating at about 70 percent of capacity. In the next two quarters, the company hopes to be close to full capacity, he added.
Ruia lauded the government’s efforts to introduce minimum import price (MIP) and anti-dumping duty, which has stopped the influx of dumping of Chinese steel. He added that the company is working with banks for restructuring within RBI's S4A guidelines.
Below is the verbatim transcript of Prashant Ruia’s interview to Nisha Poddar on CNBC-TV18.
Q: Give us a breakup of how you are going to utilise the funds that you have now got and the valuations are on the higher side?
A: I think firstly just to clarify the transaction is really two parts, there is a USD 10.9 billion valuation for the Essar Oil piece and then there is an additional part USD 2 billion for the port which is becoming part of this transaction.
Overall, we believe that the transaction did attract a lot of interest from various global players and we are very happy with the final transaction which we close yesterday with a consortium of Rosneft, Trafigura Group Pte and United Capital Partners. In terms of the utilisation, this is where enterprise value so it includes operating company debt which will obviously move along with a company which is being taken over.
Approximately, little more USD 5 billion of debt moves along with the asset and then the rest part of it is being used to deleverage our holding company and we expect about USD 5 billion of debt to be used for that which will largely, substantially deleverage the holding company. Totally, in terms of utilisation of proceeds nearly USD 10 billion which is about Rs 70,000 crore of deleveraging will take place as a result of this transaction for the group.
Q: Do you think it’s the end of that woes for Essar Group in your view?
A: I don't subscribe to this debt woes situation or story. We went out and made very, very large capital-intensive investments. We brought a lot of equity. Normally, for any of these transactions about one-third of the investment comes in, in the form of equity. Some of the projects got into difficulty because of some of the regulatory problems which we have had and that gave concern to the debt effectively of those projects. I do believe that many of those issues have been addressed and from a group perspective we have once again demonstrated our ability to build projects despite all the problems one faces in the Indian context, grow these businesses, create value and then monetise at the right time.
Q: You have created assets which have been sold to these foreign investors. Vodafone has come in, Rosneft has come in, so what is your plan for Essar Steel? That has a huge asset and I am sure there is going to be a huge amount of interest in that as well.
A: Now in the last one year things have turned around for the steel industry. Obviously, on top of that we had the global headwinds which commodity sector faced last year. We had a significant drop in the steel prices and iron ore raw material prices. We had the added feature of dumping which was happening from China. So, this all together became a fairly heavy mix for the sector. Thankfully things have changed a lot in the last 9 months.
The Government of India has taken some very proactive steps by introducing minimum import price (MIP) and anti-dumping which has stopped the influx of dumping of Chinese steel. Most of the issues which we faced in terms of project completion are behind us; the plant is now operating at about 70 percent of capacity. In the next two quarters we hope to be close to full capacity. So, most of the things which were affecting the industry and Essar Steel in specific have been addressed. We are working with the banks to do a restructuring within the guidelines whatever is permitted, so that we can move on and continue with the asset.
Q: You think that S4A guidelines, those being relaxed will be in your favour in terms of restructuring Essar Steel’s debt?
A: I don’t know finally what the guidelines in terms of relaxation, we have all heard that government and the Reserve Bank of India (RBI) are relooking at some of these guidelines because they have not really been that effective in the last few months or in the last two or three quarters. We will wait to see what comes out but we are certainly hopeful that we are able to restructure quickly and we are able to move ahead. The company itself is performing significantly better now than it was last year.
Q: You are getting so much of funds coming in which is going to deleverage the overall group by the Rosneft deal. Now is that some bit of money also going to flow in Essar Steel by way of equity?
A: It is a very good question. The answer is yes, we will whatever additional equity is required to complete to achieve the restructuring will be set aside. I would also say that the actual money required in Essar Steel is not very much because the capital investment is largely completed and the plants are already fully operational and generating very reasonable revenue and margins. So, it does not require a huge amount of funds but at the same time whatever is required, we will provide it as part of the restructuring.
Q: Are you also looking at some equity participation coming in from some financial investor in the steel business because there was a turnaround in the cycle?
A: At this point we don’t need it because we have done with the monetisation which has happened, we have the ability to fund this ourselves. So right now the focus is to grow the business, to get it to a level where we are able to gain the benefit of all the investments which have been made over the past few years and then we will see.
Q: The banking system is also working with the companies which are capital intensive right now and steel, power, these are some of the sectors which have been on top of their list as far as their exposure is concerned. Are there meeting grounds with the banks, would you be okay with, if they convert some part of the debt into equity and restructure the entire company so that it can be very able and viable going forward?
A: All I can say right now is that there are going to be certain guidelines within which all the companies are going to get restructured. Whatever those guidelines are we will be at par for most of the companies which fall under those guidelines. We will follow the guidelines. If those guidelines mean some debt needs to be converted to equity, then we will have to fall in-line with the guidelines.
However, we are confident that we will be able to find a resolution and we believe that the assets which we have on the ground which are now fully performing are world class assets and there is no reason that they can’t deliver in the future. Just to give you a similar case, even in the case of Essar Oil, we did face some issues about a decade ago when the project was stalled and we went through a delay but we worked with the bankers, we worked with all our stake holders and we completed the project.
In fact we doubled the project it used to be a 10 million tonne refinery, then we went ahead and we did an expansion. We brought it to 20 million tonnes, built a retail network and the result of that is where we are plus there is a very real opportunity to expand the refinery, built as the demand for petroleum products keep growing in the country. We have the ability to expand the refinery which was also one of the factors, which attracted Rosneft and Trafigura for this investment.
Q: One question I definitely wanted to ask you sometime back you had stated, you had issued press release saying that you have hired some banks for sale of equity in Essar Steel. Things have changed tremendously from that time to now, should we say the way you are confident about the steel sector now that sale is off the table?
A: Absolutely, I think very much so, it was a year ago it was a period when there was lot of uncertainty around the steel sector, there was huge amount of dumping taking place, global situation was very different. The things have moved on a lot since then and we are looking ahead.
Q: One more question about the transaction that you have just signed, are the minority shareholders of Essar Oil going to get some differential, is there an upside to the valuation at which the delisting happen compare to the transaction valuation?
A: It is a very good question, because the answer to that is yes. When we did the delisting of Essar Oil; one of the things which came up was there was already talk of some transaction and we approach as part of our discussion, we approach SEBI and said that we could suggest it that one of the thing which is possible is that we make sure that even though the company is delisted, if there is a transaction at a higher price, we will compensate the minority shareholders.
This is really the first time that something like this has happened in a company which is actually being delisted. This of course was readily accepted by SEBI and they gave it back as one of the conditions of the delisting. The company was delisted at a price of Rs 262 a share. We do believe that when once the final numbers come out, it will be at a price higher than Rs 262 and we don’t know the exact amount, because right now what has been agreed is an enterprise value and by the time the deal closes the debt and the current live assets and current liabilities will need to be accounted for and then we will arrive at final equity value. We do believe that it will be more than Rs 262 and the difference will be compensated to the minority shareholders at the same time when we get the majority shareholders get their cash for the shares.
Q: So equity valuation at the time of delisting was about USD 5.8 billion, how much of an upside are we expecting if you could give a range?
A: I don’t have the exact number and I don’t to give just an estimate because that won’t be right, but it will be more than USD 5.8 billion for sure and the benefit will go to all the shareholders equally.
Q: What about the power assets, you have a large power portfolio here. How do you see it growing in terms of the size and the utilisation level because you are lower than what your capacity is at this point on ground and what are you doing about coal shortage because feed stocks is going to be an issue specially for projects like Mahan?
A: Firstly, overall portfolio is about 6,000 megawatts which is what we went out to invest. We have currently about 4,800 megawatts operational. Of that about a 1,000 megawatts will go as part of this transaction. So, what we will be left is about 5,000 megawatts and 3,800 megawatts of that is operational and the last 1,200 megawatts is a project in Jharkhand which we are yet to complete. We hope to complete that in the next 18 months.
Overall if you look at our overall capital expenditure program then we are about merely 96-95 percent of the program has been completed and we are at the fag end of the overall program for the group as a whole. Jharkhand is probably the one asset which is not yet fully completed.
Having said that the overall situation of this sector is looking much better because coal availability has improved a lot. So, there was a lot of uncertainty after the mines were cancelled because people were not clear as to how you will get coal for these standard plants effectively. But now that the coal production in this country has gone up significantly we do believe that there is sufficient coal available and therefore that major concern has gone away. India is even talking about even exporting coal now something which was probably unheard of two years ago. So, that is a very big positive.
The UDAY scheme which the government is currently implementing will improve the situation a lot for the distribution companies of the states and a combination of this will get us to the ultimate goal which is what we are all looking for which is improvement in demand of power, improvement in availability of power, less load shedding which is what is currently happening in the state and that will ultimately result in better price for power which has really gone down a lot. So, what used to be Rs 5-6 a unit on the exchange is now down to less than Rs 3 a unit for power. So, we do believe that that will also get ultimately as the demand picks up there will be a correction in that.
Q: But you are not looking at monetising any of the assets in power sector?
A: No, at a group level with this transaction now being completed we are focussing on rebuilding and completing the rest of the investments which we have made in the rest of the portfolio and growing the business in each of those portfolio companies.
Q: What do you have to say about the overall portfolio. It is a very well diversified conglomerate. Now going forward five years down the line which are the two sectors with which you are pinning most amount of hope at this point which would be the next generation companies for Essar Group?
A: In terms of scale the two sectors which will be very large for us as of now will be the steel sector and the power sector. But we believe the port sector has tremendous promise. We have an Engineering, Procurement, and Construction (EPC) business which is something which we started with in our group. We continue to be in the oil and gas business with our refinery in the UK and our E&P business. So, there are lot of parts there.
The Essar Oil refinery business was about 25-30 percent of the group and so the rest of the 70 percent of the group still is very much there and we continue to focus on that. We have not picked two winners in that yet. We want to see what the opportunities are there in each of the sectors in the future.
Q: Do you also want to do portfolio management in terms of which are the sector that you don't want to focus on too much like the business process outsourcing (BPO). Are you looking at it for future growth in the group or would you not mind shedding some of these businesses?
A So, we have taken those calls. In the last few years sectors or businesses which we felt were not critical we have exited. If you look at it on a portfolio basis and Essar Oil was clearly not one of those. It was a decision much more driven by philosophy of creating value and we felt the valuation was right and we monetised it. But if some of our smaller businesses which are not consequential we have exited. In fact even in our BPO business we have in Aegis Limited we have about a couple of years back we sold our US part of the business to Teleperformance. So, yes that is certainly something which we are open to but broadly I would say as a group we are now going to focus on building value and focussing on the sectors with the rest of the businesses which we have.
Q: Could you also share your global footprint and the businesses that you are in? You are there in North America and some of the other businesses, smaller though in nature. So, how is the entire portfolio looking when it comes to the overseas businesses?
A: Some of the steel businesses are going through a similar cycle as we are going with the steel businesses, they are also in a turnaround situation. US was as much affected in the steel space as was Europe, as was India in that sector.
The UK refinery itself is doing very well. We invested USD 350 million in the UK refinery, it is a 12 million tonne refinery. We have about 13 percent market share in the UK and that company is doing extremely well. So, it is a bit of a mixed bag in our global footprint. However we will continue to focus on all of those sectors.
Our businesses are cyclical. In fact many of our sectors are cyclical sectors and the steel business went through a difficult cycle in last two years but we are seeing the change, we are seeing it positive again and we hope that the same impact will be there on our global side of the business also.
Q: Do you think that the macros at this point are really supporting because even though there is euphoria in the stock markets, there isn’t that much euphoria on the ground when it comes to the earnings cycle or investment cycle. As a promoter how do you see these really coming off, taking off the ground anytime soon, are we expecting any of this?
A: In the last 3-4 years what has really slowed down is the investment cycle in the country. I think a large part of that has got to do with some of the policies which happened in the last two years of the previous government because it created a situation of risk which were unplanned by the investors. So, you had investors coming in an investing huge amounts of money and suddenly things were happening which they had not thought of or not planned. In the last two years many of those issues have been addressed and macroeconomic indicators are now moving in favour. So, we are seeing consumer growth pickup to double digits. We are seeing interest rates beginning to soften, we are seeing inflation down at very low levels, these are signals which say that there is going to be better demand. Hopefully that will trickle down to the basic infrastructure core sectors which are still seeing currently 5-6 percent kind of growth. We had a very strong monsoon which generally is very positive thing for the country. So, all of these factors point in the direction that we should see higher growth in our core sectors. Once that happens that will lead to again the investment cycle which we are all waiting for.
So, hopefully in the next 4-6 quarters we will see that come back and we are all very hopeful, I am personally very hopeful of that.