After selling its crown jewel, Essar to scale up biz in steel, power

Riding on assets sales across its real estate, oil refining and business process outsourcing businesses, Essar Group is set to reduce its overall debt from $14 billion to $6-7 billion over the next few months.

This will give the Group breathing space to scale up its businesses in steel, power and ports sectors.

Aggressive expansion Back in 2007-08, at a time when the UPA-led Government was at its peak and the economy showing signs of a strong growth, Essar Group made a $18-billion bet to expand their operations spread across steel, power, ports and oil refining.

The plan was an aggressive one taking the Group’s assets from $6 billion in 2007 to $20 billion in 2015 and revenues from $5.5 billion to $27 billion.

During this period, the Group built capacities across its businesses. Its steel business went up from 4.6 mtpa to 14 mtpa, power capacity was up from 1015 MW to 4675 MW, refining nearly doubled from 10.5 mtpa to 20 mtpa and ports business tripled from 40 mtpa to 140 mtpa. To do this, the Group pumped in $12 billion equity and $14 billion debt.

But somewhere in 2012-13, things started going wrong for the business. Largely hit by changes in regulatory environment and overall weakening of sentiments due to scam-hit UPA Government, Essar started losing momentum.

For example, in the steel business, non-availability of committed natural gas, the main feedstock, coupled with high import prices, resulted in over 50 per cent of steel plants’ capacity idling. Delays in environmental approvals and Naxalite activism caused disruptions in the slurry pipeline that would bring the iron ore into the plant.

Similarly, in the power business, the Group’s Mahan and Jharkhand (2400 MW) plants have been impacted because of the cancellation of the allocated coal mines.

The cumulative impact was that it resulted in stress on the company’s cash flows and delays in debt servicing.

Signs of turnaround Some the Group’s business is showing signs of turnaround. The power business, for example, has witnessed a major turnaround with the recent fall in coal and gas prices.

This has enabled the company to generate profits after a gap of three years.

The ports business has improved with higher capacity utilisation.

The present capacity is 140 mt and this is slated to increase to 170 mt by the end of the current fiscal.

The oil business, however, was by far the most valuable. Essar Oil reported a seven-fold rise in profit to ₹364 crore in the third quarter of FY 2016 riding on highest ever current price gross refining margin of $13.25 per barrel, compared to $7 per barrel in Q3FY15.