Essar group, a saga of rapid rise in the last couple of years

The wheel has turned a full circle for the Essar Group which, till a few years ago, needed a lot — a lot — of cash.

On February 1, 2010, the group launched a new communications campaign, aired across television stations in the 20 countries it operates in with a simple catchphrase: “Let’s begin”.

But begin the company had three years earlier, in 2007, when Vodafone Plc bought out Hutchison Whampoa Ltd’s 67% stake in what was then Hutchison Essar for nearly $11 billion.

Hutchison also paid ¤1,865 crore to Essar to ensure the transaction. It was the first cash tranche the company received from the deal.

The group also ironed out a guarantee whereby Vodafone agreed to pay $5 billion under a four-year call option to the Essar group if they sell their stake, based on an enterprise value of $18.8 billion.
“This guarantee could have been one of the stepping stones for a cash-strapped group to enter the big league. Although they wouldn’t have raised money directly in the name of the company but the various holding companies of the group raised the money and pumped into its respective businesses,” the banker said.

Between 2007 and 2010, the group raised close to $4.8 billion from domestic and foreign banks, backed by a 33% stakeholding in Vodafone Essar. This includes $3.6 billion raised by pledging 22% stake.

Wind back in time, and you find the group had a dubious track record among investors, specifically in 1999, when Essar Steel defaulted $250 million foreign currency floating rate notes.

Today it has swelled to a $15 billion conglomerate, with a substantial presence in steel, shipping, ports & logistics and information technology.

While experts say the group was historically slow in expanding compared with peers such as the Jindals, one thing that was strikingly different from other family-owned businesses was that they always held their cards close to their chests and were experts in delivering masterstrokes.

“It was relatively well-placed but they were looking for capital infusion,” an executive working with one of the domestic ratings agency told DNA Money. “And the money from the Vodafone deal helped the group grow substantially,” said the person, who did not wish to be identified.

And where did the company invest the money? Essar executives were unavailable for comment.

“Money has no colour,” said the head of a Mumbai-based domestic brokerage house, when queried on this.

But it certainly helped improve the fortunes of the promoters: Currently, brothers, Shashi and Ravi Ruia (Expand the first letters of their names, S R, and you get the name of the conglomerate Essar) are the sixth richest Indians, with a personal fortune valued at $7.6 billion by Forbes.

Essentially, this money helped the Ruia fuel their ambitious projects across sectors. The first in this series was the delisting of the company’s steel business by the end of 2007 as a part of a corporate debt restructuring process.

Since 87% of the company was controlled by the promoters, Essar spent `770 crore to buy back remaining 13% shares from the market.

But delisting did not mean the Ruias were exiting the steel business: In fact, they are expanding capacity from 9 million tonnes per annum (mtpa) to 14 mtpa by 2014 — in the arid coast of Gujarat.

“At any point in time, there are 45,000 people working at the site,” said a company executive from the steel business.

Essar bought Canadian steel player, Algoma Steel for $1.63 billion in April 2007. This was immediately followed by yet another acquisition in North America — Minnesota Steel, and committed an investment of $1.65 billion in the company which had substantial reserves of iron ore.

Then in January 2008, Essar Communications Holdings, the telecom subsidiary of the group, acquired 49% stake in Kenya-based Econet Wireless International which was followed by its BPO division Aegis Communications’ 100% buyout of US-based PeopleSupport for $250 million in August 2008.

Aegis since 2007 has made 11 acquisitions. This was simultaneously followed by acquisitions of oil and gas exploration assets in Vietnam and Venezuela.

The spree for acquisitions continued till currently when it recently acquired Zimbabwe’s flagship steel company Zisco for $740 million in March 2008 followed by Shell UK’s 12 million tonnes per annum Stanlow refinery for $350 million.

“They are very smart people. Although they had a dubious track record and were cash-strapped in the late 90s, but have employed innovative strategies to grow and today they are one of the biggest player in steel, shipping and energy,” said an investment banker.
The growing sprawl of the steel business is part Ruia’s plans to build not just steel but an oil refining, exploration and production powerhouse. Since, the company was also building on a debt, they needed equity infusion and that explains the listing of Essar Energy,” said the executive from the domestic ratings agency.
The Ruias got Essar Energy listed at London Stock Exchange in May 2010 and raised $1.8 billion.

Of this money, the company has invested $717.2 million into power (including mining assets) and S$55 million in the exploration and production business.

In December last, Essar Energy reported revenues of $10 billion, up 42% from the near $7 billion in the year-before period. The company expects to complete $4.9 billion of projects by the year 2011.

The prized trophy of Essar Energy is its oil refinery at Vadinar, where it plans to expand capacity to 18 mtpa from 14mtpa by next March and 36 mtpa by 2013. It expects to invest a total of $4.5 billion.

At the same time, it plans to more than double the ability of the refinery to handle lower-quality oil, known as sour crude, increasing its Brent Complexity Index rating from 6.1 to 12.8. This will increase its margins and enable it to stay ahead of global emission standards.

Like the steel plant, Vadinar is also a vast construction site. Across from the refinery, it is building the Salaya 1,200 megawatt power plant.

This is part of its plans to deliver 11,470 mw of power generation capacity by 2014, at a total cost of $16 billion.

Still, analysts are concerned at the growing debt piling on the company’s balance sheet.  Essar Oil has a debt, ¤10,000 crore with Essar Energy over $7 billion.

However, Prashant Ruia, vice-chairman of the Essar Group, remains confident with the road ahead for the company.
“We remain well-funded and continue to execute well our significant pipeline of growth projects, which will further increase cash flow and profitability,” he said at a recent conference call.
But the group remains weight down by a total debt of $8 billion. That figure could rise 50% to $12 billion by the end of 2011, including debt in unlisted companies.

That’s a big cause for worry, say observers.