Overseen by PM Narendra Modi and Russian President Vladimir Putin, Ruias’ Essar Group on Saturday sealed a $13-billion (R86,100-crore) deal to sell its 98% stake in its flagship 20-million tonnes-per-annum refinery to a consortium led by Russia’s state-owned energy giant Rosneft along with Moscow-based private fund United Capital Partners and Switzerland-based commodity trading firm Trafigura. Prashant Ruia, director, Essar, discusses how it would cut the group’s debt, and the road ahead, in an interview with Siddhartha P Saikia. Excerpts:
The Vadinar refinery is the jewel of Essar and you are exiting it. What is the road ahead?
Firstly, we would like to clarify that our businesses have been doing well and oil and gas is one of them. Essar Oil India is about 25-30% of Essar portfolio. We believe that we have created a significant value in the last few decades in the oil and gas business, and we felt that this is the right time to monetise. As you know, our model is to build the business, nurture it, create value and then monetise. This is the model of the group, which we have demonstrated time and again — you have seen it in telecom and now you are seeing it in oil and gas.
Is the group under pressure to deleverage debt and is it a stress sale?
This is an incorrect perception created by incorrect media reporting. Capital structure of any company comprises both debt and equity. The debt that each company has taken is not just debt; it is supported by corresponding equity and we have used the capital to build world-class assets. So, there is a lot of value in the asset for which the debt has been availed. It is not just debt in isolation. If you are building a power or a steel plant or a refinery today, you can borrow up to 65% of the investment in debt and 35% needs to come as equity. Everybody is looking at the debt component, but there is a huge equity part, too, which is at risk prior to the debt. Secondly, you must consider the fact that you have an asset with significant amount of value in a country where building an asset is not easy. And it takes a lot of time to build these assets — we took 15 years to build Essar Oil. You should also look at the earning capacity of the asset and its ability to service the debt. If the asset has sufficient earning capacity, there is nothing wrong in having that debt. If this capacity is not there and, you only have the debt, and that is a problem.
How much debt you would deleverage post this transaction?
We have said reduction in overall group debt will be in excess of 50%. And this is really happening at two levels — at the operating company and the holding company levels. We are deleveraging most of our debt and this would probably be one of the largest deleveraging stories in the history of corporate India. I don’t think there are too many examples of such a large amount of deleveraging at one go.
How much holding company debt would be wiped off?
Let’s put it this way — most of it is gone. The holding company level debt would be deleveraged.
Is there a discussion with your lenders on this transaction?
Absolutely. The lenders are fully involved. We have discussed this with our stakeholders, government and all people connected with the transaction. It’s a global transaction and a big one for the country. It is very important for the bilateral relationship between India and Russia. So, at many levels it is a historic transaction.
So, can we expect more such transactions?
Watch this space! It takes some time to create assets of this scale. After the telecom business, it has taken us a few years to make a big announcement.
Would you be keen for a greenfield refinery again?
I don’t think today is the right day to talk about it. We are still focussed on Essar Oil and that is the primary company we had for refining. If you look at our overall portfolio, the strength of our group is to identify opportunity, build world-class infrastructure assets. The sectors of our core strength are of course — oil and gas, steel, ports and power. We will continue to focus on the oil & gas business as well, by way of our presence in refinery and oil retailing in Stanlow, UK, and the exploration & production business globally.
After deleveraging most of your debt, do you plan to step into a new business?
Right now, focus remains in the sectors where we are present — 5 of them. We haven’t at this point decided to enter any new sector. That is something for the future. There are a lot of growth opportunities in the existing sectors.
Do you expect Trafigura to exit sometime soon?
I think they are looking at this as a very strategic transaction. Trafigura is one of the world’s largest trading companies for both crude oil and products. I don’t think they are looking at this as a short-term investment.