For India’s Essar Steel, a Pinch of Bad News with an Overdose of Good
These are difficult times for the steel sector in India, and some companies have been trying their best to navigate safely through these tumultuous times.
Integrated steel producer Essar Steel, one of the largest in India, is one such case. Beginning last year, this company has been sailing in some pretty rough weather, but those at its helm affirm that they were in for some pretty calm sailing soon.
Having its debentures just been downgraded by well-known ratings agency Care Rating to “default” status, Essar does not seem unduly perturbed by the development, with some of its top management even expressing surprise at the downgrade. Care downgraded the company’s non-convertible debentures to default grade due to certain payment delays.
For now, the company’s entire attention is on completing the “last mile” of its capacity expansion by 2014; because this, once done, is expected to boost its earnings three-fold and stave off a liquidity crisis.
In an interview with The Economic Times, new Executive Vice Chairman Firdose Vandrevala, a steel industry veteran who spent over three decades with the Tata Group, revealed that Essar was also seeking to strengthen its working capital needs by selling assets and raising equity from promoters in addition to ‘dollarizing’ its existing rupee debt.
Firdose was appointed at Essar this August. He barely had time to settle down when his company was hit by the Care downgrade. In media interviews, he has said the downgrading could have been triggered by Essar’s balance sheet last year. Poised on an expansion plan, the timing could not have been worse for Essar; in such cases, it does cast a shadow of doubt over a company’s fundraising capacity. But even then, Firdose is putting up a brave face. He claimed there had been several positive developments in Essar since. The downgrade, he asserted, will not impair his company’s fund raising plan.
Essar Steel officials claim they had drawn up a well-defined turnaround plan for the company, which would improve the operations and liquidity position. This included an equity infusion from the promoters, apart from the asset sales and the ‘dollarizing’ of debt to the extent of $3 billion, as reported by MetalMiner, that will enable the company to reduce interest costs.
The company has steadily increased capacity at Hazira in Gujarat to 10 million tons, with downstream steel units, which includes a heavy steel plate mill and greater steel tube-making capacity. By November, expectations are that the pellet plant capacity in Odisha would have gone up to 12 million tons from 6 million tons per year, and the plant in Vizag in the state of Andhra Pradesh have expanded to 8 million tons per year, taking the company’s annual pellet-making capacity to 20 million tons per year.
And, as if accepting the measures undertaken by Essar, just a few hours into Thursday came the news that Indian lenders had agreed to guarantee a US $2 billion overseas loan for Essar Steel which would allow it to repay a part of its rupee-denominated debt.
Nothing new. It is deja vu all over again, a repeat of the 1999-2003 experience. The Ruia family loves to live on the edge of danger, walk on a high wire, but the banks know that there is very little chance they will fail. The only weakness is “foreign creditors and counterparties” who do not know how such promoters operate. ESSR has a 500mm gbp convert maturing in a few years trading at well below par as is the share-price, quite depressed. Foreigners can panic as they have when they exited India en-masse shorting the Rupee.