Majority cos with Re loans to look at raising ECBs: Essar
Jun 29 2012, 11:58 | By CNBC-TV18
The Reserve Bank of India on Monday hiked the limit of external commercial borrowings (ECBs) to USD 10 billion in an attempt to attract more foreign inflow. This move comes as a huge positive for India Inc, that can now look at several different avenues to raise finance for their projects.
In an interview to CNBC-TV18, the group CFO of Essar Group V Ashok says that majority companies with rupee denominated loans will look at raising ECBs. "For groups like us which have a predominantly rupee balance sheet, because our capex and our borrowings are in INR, it's a very welcome step to swap these with dollar loans," he said.
He goes on to say that the appetite for these ECB loans is good. "I think the USD 10 billion should have been limit over by yesterday, that's how the appetite is," he said.
Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.
Q: Manufacturing companies like yours will now be able to take forex loans and swap their rupee loans with FX loans. Is this immediately beneficial to you?
A: Essar has been propagating this issue for the last couple of months. We have been pushing various bodies to make sure that ECBs are available for prepaying rupee loans. The end dues of ECBs have always been a concern for corporates in these tight liquidity conditions and high interest rates. So I think it's a very welcome move, it's path breaking.
I think it's the first of many steps towards capital account convertibility. In that context, the regulator has done a wonderful job. For groups like us which have a predominantly rupee balance sheet, because our capex and our borrowings are in INR, it's a very welcome step to swap these with dollar loans. Even though there are couple of concerns as we read the fine print of the guidelines, but I am sure this can be ironed out. Overall, according to me it's a very positive step.
Q: But you ought to have foreign exchange earnings to be able to avail of this, isn't it?
A: That was the key message which we drove to RBI. With our main two flagship businesses steel and oil having a track record of exports and a great hope of increasing this trend over the next 10 years, we have substantiated that these are export driven companies with lot of foreign exchange earnings and we are pretty confident that the dollar earnings are suffice to repay the borrowings under the ECB umbrella. Unlike companies which don't have exports, we have a substantial amount of our products in oil and the steel products as export dominated.
Q: We did have some experts point out that majority of ECB loans are sourced from Europe, and considering that the situation in Europe is so grave or precarious at this point in time, it's difficult to attain these loans. What is your view point on the same?
A: Yes I agree because the banks are not been allowed to issue standby letter of credit (SBLC) or guarantees for availing the ECBs. So for a bank which is going through turmoil in Europe and other parts of the world, for them to risk in India today would be a challenge. Hence we are telling the RBI to relax the norms so that Indian banks can issue SBLCs to avail ECBs.
It's a challenge, but also do understand there are Indian banks that have got offshore branches who can also lend in dollars. Indian banks have lent rupees to us, they have taken a project risk, the project has been completed and the risk goes off from there now. For them to now lend offshore dollars to us, to repay rupee loans is not a big challenge. So only source avenue being the European banks is not true at all.
This SBLC is a concern. We have got some feedback from banks saying that if there is guarantee from Indian banks they could definitely look at ECBs, but I think India has always managed to get ECBs. Essar also has drawn lot of loans earlier in ECBs, we have got a lot relationship banks around the globe that are willing to look at Essar for ECBs and other foreign currency loans. So we are pretty hopeful. I don't think that's the most important problem we have in hand right now.
Q: Do you expect this USD 10 billion limit to then be lapped up quite soon and can you throw some light on how exactly the ECB market has panned out in the past vis-à-vis now?
A: I think the USD 10 billion should have been limit over by yesterday, that's how the appetite is. USD 10 billion is little less, but you can keep asking for the moon, there is no end to it.
Q: Any of your listed stocks will be benefited through lower interest costs you think?
A: Yes the ports business and the oil business will benefit, so Essar Ports and Essar Oil.
Q: There is also the leeway given on money invested in infrastructure bonds. The lock-in has been now reduced to one year and the residual maturity has been cut to 15 months. Are you seeing that as a source of money coming in at all?
A: Yes, it is. I think we are pretty strong in infrastructure and power, ports and other businesses, so I think that will really help having more appetite. But it's not these policies which are a concern, these have been pretty liberal. We need to get the whole infrastructure thing going right now as a country, there has to be an increased emphasis on infrastructure growth.
Recently there have been a couple of steps in that direction. A few banks have joined together to form infrastructure funding group, and then there was something on the PMO office looking at huge infrastructure projects and tracking them. I think those are the measures which will bring sentiments on investments. Individually there is appetite for companies like us, but I think the overall the macro has to improve.
Q: How are you planning to pay that huge liability Essar Oil has of Rs 8,000 crore? How much will it show up in terms of interest costs in the current year?
A: On the sales tax front others in the world are losing more sleep than we are. We know what we are doing, we have got our lines tied up. I think it's not a big concern at all, it is part of the process.
Q: Your FY12 interest payment is Rs 1400 crore. How much will it go up to in Essar Oil in FY13 you think?
A: No it will come down.
Q: Inspite of borrowing Rs 8000 crore more?
Q: Could you just highlight where exactly the process stands at this point in time? We understand that you are going to appeal to the Supreme Court. Just give us a list of events which we could expect with regards to the sales tax deferment liability?
A: We are going to the Supreme Court to appeal against the order and we will see how that shapes up. There are contingency plans in the company, so nothing to worry at all.
Q: Essar Oil hasn't exited the CDR yet, has it?
A: Very soon.
Q: How soon, because we have been hearing very soon for sometime?
A: Very soon. Just wait for sometime.
Q: Would raising equity be on the cards at all then for the company?
A: All options are available any point of time. For a corporate at our size, options of raising capital are always there, so we will keep examining options. I can never said yes or no, but all these things happen.
Q: Globally we are seeing a dip in raw material prices used by the steel industry, so how will margins pan out for that unit? I know it's not listed, but it still impacts the overall group revenues. Will steel be doing better in FY13 than in FY12?
A: 100%. I think we are fully integrated backwards now. We got our facilities in the East Coast ready to supply raw materials. So I think the margins per tonne for Essar Steel this year should be far, far better and as we go forward these are best days for the company.
One thing on steel I think I should point out is that there are no capacities coming in. We have a huge headwind on this, we have put up the assets and going forward I think steel manufacturers like us who have got world class facilities will definitely enjoy the run going forward.
Q: Can you just leave us with what exactly is happening with the Mahan coal block, where do things stand on that front?
A: We have got the approval to go ahead with the mining, that's the best news for us.
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