Weighed down by borrowings of close to R38,000 crore and falling prices of steel, the Ruia-promoted Essar Steel is hoping lenders...
Weighed down by borrowings of close to R38,000 crore and falling prices of steel, the Ruia-promoted Essar Steel is hoping lenders will agree to refinance a loan exposure of R12,000 crore via the 5:25 scheme that would help ease the pressure on repayments.
The company is also looking for an additional working capital of R4,000 crore from the 15-member consortium, Firdose Vandrevala, executive vice-chairman, Essar Steel, told FE. “The loans are in different stages of sanctions as there are several lenders involved,” he explained.
In FY14, Essar Steel earned an operating profit of just R36.25 crore while its interest bill was R4,580 crore; the firm’s gross debt stood at R37,559.94 crore at the end of March 2014 . Vandrevala acknowledged that the company’s margins are under pressure, but says that realisations should improve with the commodity prices easing. “We aim to win back some of the markets we have lost to imports through higher-grade products. We are already Ebitda positive and hope to break even next year,” he said.
Bankers had restructured their exposure to Essar Steel via the corporate debt restructuring (CDR) cell in 2002 but the company exited the cell in 2006.
The 5:25 scheme covers the infrastructure and core sectors and allows a consortium of lenders to refinance an exposure every five years, over a period of 25 years, provided, a fourth of the lenders is new.
The idea is to match the payouts on account of interest with the cash flows earned by the company so as not to unnecessarily burden it.
A banker from the consortium, which includes State Bank of India and IDBI Bank, said the company could be a candidate for the 5:25 scheme since it operated in the core sector.
The banker added that “as long as the projects were on track we will consider the proposal”.
The steelmaker has dollarised $2 billion of its debt through external commercial borrowings and the export securitisation route, resulting in savings of over Rs 700 crore annually since the interest rate is lower at 6% compared to 12% on the rupee loans. How much the company is paying to hedge the dollar exposure is not known. The steel maker is also looking to monetise its Odisha slurry pipeline, after having sold an oxygen plant to the Inox Group for Rs 750 crore. “SBI Caps has worked out a proposal and we are in discussions with three investors for a sale and lease agreement,” Vandrewala said.
Meanwhile, although iron ore prices have fallen globally, NMDC has been slow to reduce prices, eating into Essar’s realisations. Moreover, a recent HSBC report notes that the growth in India’s steel consumption between April 2014 and now has been only 2%, lower than the 8% average in the last ten years. Over the past year, imports into India have increased 60% with purchases from China rising 200%.
Analysts point out that the huge capital expansion, delayed completion of projects and falling prices of steel have impacted the firm’s cash flows.
“JSW Steel, under similar circumstances, has done operationally better by completing projects in time. Despite having a slurry pipeline to transport NMDC’s iron ore from Chattishgarh to Vizag that cuts down on freight costs, Essar Steel has not been able to reap the benefits fully,” an analyst, who did not wish to be named, said.
Vandrevala pointed out that iron ore prices, quoted by NMDC, are still on the higher side and negotiations to bring down the prices are on. The company has a prospecting licence to mine iron ore in Chhattisgarh, but Naxalite issues in the area have made any progress difficult. “With the passage of the MMDR Bill making auctions more transparent, we will be keen to bid for mines in Odisha because we have a pellet plant there,” he said.
Essar Steel invested a massive Rs 37,000 crore in a 10 million tonne steel plant in Hazira, Gujarat. In the company’s annual report for 2013-14, auditors cautioned the company over its current liabilities exceeding its current assets by Rs 6,125.92 crore (previous year Rs 11,905.29 crore) as at March 31, 2014.