Essar Group today announced that it has entered into a definitive agreement with Rosneft and a consortium of Trafigura and United Capital Partners (UCP) for 98 percent stake sale of Essar Oil Ltd.
The deal includes Rs 72,800 crore for Essar Oil's refining and retail assets and Rs 13,000 crore for its Vadinar port and related infrastructure.
Read more: Rosneft to buy 49% stake in Essar Oil in an all-cash deal
This deal comes as good news for the Ruia's as it will help reduce the Group's debt and enable to focus more on the mainstream business of the steel sector, says Sanjiv Bhasin of IIFL.
In an interview with CNBC-TV18, Deepak Mahurkar of PWC said,"This kind of an investment is going to take us to a stage where we will also be able to challenge the ability of India to produce locally."
Energy expert Narendra Taneja said that this entry of a global giant like Rosneft will put tremendous pressure on domestic players like IOCL, BPCL etc and will work out in favour of the Indian customer.
In the same interview RS Sharma, Former CMD of ONGC, JN Gupta, Former ED of Sebi and RK Bansal of IDBI Bank listed their view on this deal and its impact on the Indian oil and energy space.
Below is the verbatim transcript of the interview.
Ridhima: What are your first thoughts?
Bhasin: Given the context, it is a win-win situation for both. I think firstly for the Rosneft, after seeing the rubal hit 82, it is back to 62, so they have seen a 28 percent jump in the currency. The stock itself from 225 levels is up to 353 and a 58 percent jump so it is telling us that they want to get into assets outside of Russia and spread their global reach. So, for them the Indian Essar Oil buy becomes a win-win situation.
For the Ruia’s it is a very good play because they are getting out of debt and they can concentrate now on the mainstream business of the steel sector because it is also looking up. It is a win-win situation for the Indian context in the sense that a large part of the debt overhang is now being cleansed out.
So, it is a very big positive for the corporate lenders, most of the PSU and some of the private banks.
Ridhima: You heard the deal and the contours of the deal, what are your first thoughts?
Mahurkar: This is excellent news for the refining sector. Our current evaluation of ability of India to meet its own demand of petrochemical products is challenged. Any strengthening of this particular sector and new investments coming in, including collaborations taking place for petroleum products and crude are welcome news.
Especially this comes at a juncture where our economic growth is challenging availability of liquid and gas energy in the form of hydrocarbon.
This kind of an investment is going to take us to a stage where we will also be able to challenge the ability of India to produce locally. The petrochemical products and make petroleum products available for energy use.
Anisha: Narendra Taneja is calling it as a game changer but what do you exactly see as changing? Do you see Rosneft becoming part of that cartel or do you expect the prices to come down and also what is your thought, whether this is a first of many that we are seeing in the foreign investment coming into the Indian oil and gas play?
Mahurkar: Just to add a few other things that are new to this sector because of this deal, as we all know, our country admits FDI on a 100 percent level basis in oil and gas sector but it hasn’t made much difference both in upstream and downstream sector with respect to investments.
This is one welcome thing that has happened. However, another important factor, Indian investors as well as petroleum companies overseas have been looking at India as one investment regime where exit is very difficult.
Getting out of an investment as a promotion that has been done in the beginning or part participating interests of upstream blocks to be handed over to somebody else has not been easy.
It has taken not months but years of clearances in some of the blocks, some companies who made very small investments are also still awaiting clearances for exiting out of these blocks.
However, if this deal goes through, it is going to be a very positive signal to the investors, both Indian and otherwise to say that India looks up to these investors with respect and exit is not going to be a challenge.
Ridhima: You have been listening to the experts and what Ritu Singh was just pointing out; a win-win situation and a big relief for Essar.
Sharma: That is certainly a big relief for Essar. There had been a lot of pressure from the banks for the debt but I also chair FICCI hydrocarbon committee, I feel for this hydrocarbon sector that is very strongly positive news.
The highest ever FDI coming in India in this sector certainly raises the credibility. It also ensures the credibility of the Indian regulatory system and a positive message going overseas that this sort of FDI coming will be well received.
In the past if you look when British Petroleum (BP) had invested about USD 7-8 billion in Reliance, 30 percent share, that time again these positive sentiment was there but then that was seriously dented when all the controversies came into that block.
However, now this is a reinforcement of the credibility of the Indian regulatory system. I would say from the sectoral point of view it is strongly positive news.
Riddhima: What are your first thoughts?
Taneja: This has been kind of in the pipeline for a pretty long time. My own sense is that Essar has been facing financial difficulties is well known but Russia and Rosneft in particular, has been very keen to come to India to secure demand of the crude oil.
They are big crude oil producers and in present situation what they are basically looking for globally is to secure the demand of crude that they produce and with the refinery that part of that demand is now secured because India is also the fastest growing market for petroleum products.
So, here they have got a refinery which is working, very well established, which has got a good market share and at the same time it provides them access to Indian market and with this refinery access to Africa which is now going to be the biggest petroleum products market in time to come.
So, as far as Rosneft is concerned it is a big investment and it basically helps the value of their company back home to go up because they have got the guarantee, security for demand in terms of their crude oil and when it comes to Essar it solves their problem because they have been facing this problem.
If they were not in the kind of financial situation they are into they probably won't have agreed to sell it. They had to sell it because they had no other option.
But as far as India is concerned my view is that now you have a major global player like Rosneft walking into a major private sector refinery because majority of refineries in India all of them are controlled by Indian entities whether public sector or the private sector. But here is an entity which is now controlled by a foreign entity and they are going to bring in their own culture, their own capital, their own technology and they are going to look at the Indian market particularly for petrol, diesel, air-turbine fuel (ATF) and all that with a different eyes. So, you are going to see a bit of unsettling.
You are going to see a bit of changes as far as Indian petroleum sector is run today and the way for instance the Indian petroleum sector particularly in terms of retail looks today.
So, this is going to be game changer for Rosneft because they have secured demand for their crude oil in such a big market like India. It is going to be a game changer as far as Indian petroleum sector is concerned particularly when it comes to refinery and retail and it is going to be game changer also for other international company where Rosneft coming in other company would now start looking at in the Indian refining and the retail sector in a very big way. So, what we are witnessing today is not only this deal as far as some money exchanging hands. What is important is that foreign companies walking into India with big money, with big technology or hopefully with big ideas.
Now Indian company particularly public sector they should be ready because the way Indian retail sector is run is very old fashioned. The way our retail outlets you see across the country they are very old fashioned, they are at least 20 years behind in terms of technology and practices.
With Rosneft walking in hopefully they will bring the international experience. British Petroleum (BP) has already applied for license. You have 2,000-3,000 outlets. They will also hopefully bring in international experience to Indian consumers of petrol and diesel.
So, these are interesting times and this basically will put tremendous pressure on Indian Oil Corporation Limited (IOC), Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL), Mangalore Refineries and so on. They have to basically tighten the belt.
They have to look at the horizon with different eyes and they have to go for modernisation plants as far as their refineries are concerned and the retail outlets across the country is concerned. So, this deal is a good deal for Essar, their owners and all that. But the way I look at it hopefully it will be a good deal for Indian consumers as well.
Ritu: Your first reaction now that the deal has been signed. It has been going on for quite some time. We here understand that about Rs 86,000 crore of money will flow into the Essar Group. A big relief for the lenders?
Bansal: Yes, but I don't think you would have heard Mr Ruia saying that Rs 86,000 is the total value. So, there is a debt in both the companies and that debt will be netted off with some creditors also. So, the net value expected is lesser than that. So, overall debt reduction will happen and that the debt will shift from Essar Group to other group.
Ritu: Would you have more details? I am very certain that there would have been discussions with lenders as to how much of the money from the deal could be used to pare down the debt of the group companies. Of course Essar Oil and port alone has a third of debt, but Essar Steel also has a major chunk of it. Would you have some sense of how the debt would be reduced going forward? Has there been any discussions with the lenders?
Bansal: There have been discussions but as of now as I understand debt reduction is going to happen. The debt is shifting from Essar Group to other group, that is one, and these two companies. Plus some debt at the Essar global level will be reduced.