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Why it will not be easy to put the shine back into Essar Steel

The steelmaker is saddled with massive debt, posted heavy losses for four years in a row, and is operating at half its capacity.

Essar Steel's Hazira complex in Gujarat

Essar Steel's Hazira complex in Gujarat

Firdose A. Vandrevala, Executive Vice Chairman of Essar Steel, has a tough job at hand. The steel industry veteran is working hard to turn around the company, but the odds are heavily stacked against him. The steelmaker is saddled with massive debt, posted heavy losses for four years in a row, and is operating at half its capacity. Slowdown in China, the world's largest consumer of the alloy, as well as rising inventories and falling global steel prices, have added to his woes. The company's misery, however, is mostly its own doing.

In 2007, the company charted an aggressive plan to triple its production capacity to 25 million tonnes by 2012 in Asia (including India) and North America. The plans went awry after the collapse of Lehman Brothers the following year, sending shockwaves through the global economy and roiling the commodities markets. Shares of top global steelmakers, such as ArcelorMittal and Tata Steel, lost as much as four-fifths of their value, and the industry stared at a bleak future. At a time when prudence should have been the watchword, Essar Steel continued to borrow to fund its aggressive growth plans. Between 2007/08 and 2013/14, the company's debt soared fivefold while its sales grew only 20 per cent. Its 2007 acquisition of Canadian steelmaker Algoma for $1.5 billion also proved to be challenging with the unit filing for bankruptcy protection in July 2014. "The company failed to react quickly to the economic volatility during the time of expansion," says Vinayak S. Bapat, President and CEO, VXL Consulting.

Clearly, Vandrevala has his task cut out. The Tata Group veteran, who joined the Ruias-controlled company in August 2013, says he has drawn up a plan to turn around Essar Steel by ramping up output, cutting costs, focusing on value-added products and raising funds. A number of global and local factors bode well for him - low crude oil and gas prices, the Centre's efforts to boost investments in infrastructure and defence, positive sentiment around the economy and Prime Minister Narendra Modi's Make in India and Smart Cities initiatives, among others.

But, it's easier said than done. According to Arun Kejriwal, Director, KRIS Capital, an investment advisory firm, the company's liabilities are high and it will need three to four years for a turnaround. "Essar Group made these mistakes in most of its companies. The loan defaults are high in the group," he adds.

Stumbling Blocks

Essar Steel has struggled with elevated debt levels even before - it had defaulted on a loan in 1999, before turning around in 2002/03. The company again went through a difficult phase during 2011 to 2014 and is now at the bottom of the pit among its peers. Its debt level on a standalone basis is higher than other private sector steelmakers; its sales have grown at the slowest pace and it posted losses in four out of seven years since 2007/08. In comparison, Tata Steel, JSW Steel and Jindal Steel and Power did not post losses during the period.

By 2013/14, Essar Steel had amassed a whopping Rs 37,559 crore in consolidated debt, and its interest payout in servicing it stood at Rs 4,580 crore during the year. While this had initially made bankers reluctant to cater to its working capital needs of Rs 4,000 crore to fund Vandrevala's ambitious revival plan, the $35 billion Essar Group's backing helped it bag the much-needed cash. Essar also had similar issues with Algoma. After an infusion of $300 million by the Group, the Algoma unit refinanced its liabilities and deleveraged its balance sheet by $200 million. It also reduced its cash interest by $47 million. The measures helped Algoma post a profit of CDN$26.8 million in the third quarter of 2013/14, compared with a net loss of CDN$38.6 million a year earlier.

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Regulatory hurdles at home, curb on industrial gas allocation and unavailability of raw material during the past four years also proved to be a bane that Essar Steel could do without. The fall in gas production at the Krishna-Godavari Basin, which affected the overall availability of gas in the country, prompted the Centre to give priority to city gas distribution over industrial use. Essar Steel's gas-based production capacity at Hazira in Gujarat took a hit, with 6.8 mt of the total capacity of 10 mt shutting down.

The company's backward integration plans, too, suffered due to a three-year delay in getting regulatory approvals for the 253-km long slurry pipeline connecting the beneficiation plant at Dabuna to the pellet plant at Paradip in Odisha. "The operational costs would have come down by 15 per cent if backward integration had been completed on time," says an analyst. However, industry executives are not convinced. "The situation was same across steel companies. But Essar was less aggressive in production and sales. Despite the challenges, Tata Steel and JSW Steel continued producing over 80 per cent of their capacities," says a Tata Steel executive.

Ray of Hope

According to Vandrevala, things are looking up for the beleaguered steelmaker with the completion of the integrated pellet facility at Paradip and increase in production at the Visakhapatnam facility. "We are operating around 50 per cent of the capacity, up from 30 per cent in 2013/14. We look forward to raise the capacity utilisation to 100 per cent as demand increases," he says.

Essar Steel raised Rs 2,800 crore through equity and other options last year and, subsequently, another Rs 750 crore by selling its oxygen plant to strengthen its long-term needs. It is also planning to raise an additional Rs 4,000 crore through the sale and lease back of its slurry pipeline to create additional free cash flow to meet its financial obligations. "The steelmaker has the Essar Group's backing and this will help it to sail through the crisis, partly by restructuring and mostly by paying off its debts. But the turnaround time will be longer," says Bapat.

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'We expect commercial orders for lightweight ballistic missileresistant steel for battle tanks, along with ultrahigh strength steel for the Indian Navy,' says M. VENKATRAMAN, Senior VP and Head (Research and Development), Essar Steel


Industry experts expect the overall cost of production to drop by 15 per cent. It has replaced its debt in Indian rupee with dollar to reduce interest cost by six per cent. This will help the company save Rs 720 crore annually, besides stretching the loan period from three-and-a-half years to almost seven years. It plans to dollarise an additional $1 billion during 2015/16 to save another Rs 360 crore. Apart from optimising capacity and paying off its debts, Essar Steel has entered into long-term contracts with buyers to improve its pre-tax profit. "The annual pellet production will go up from 5.5 million tonnes to 12.5 million tonnes in the coming financial year," says a company executive.

A Mumbai-based investment banker says most national and international banks have exposure to Essar Group companies. "Essar Steel is the worst performer among its peers. So, its recovery is also important for banks. We expect it to come out of red with the change in fortune of the commodity cycle," he adds.

The fall in crude price will also benefit Essar Steel. The US Federal Energy Regulatory Commission data says the landing cost of liquefied natural gas (LNG) in India in March 2015 is estimated to be $6.9 per million British thermal units (mmBtu), down from $13.65 in May 2012. From November 2014, the price of gas produced in India was revised to $5.61 from $4.2. "At around $7, Essar could enter into long-term contracts and save five per cent cost," says an analyst.

Innovation Holds Key

Vandrevala is also restructuring the company's R&D division into three verticals - process development, product development and raw material beneficiation and optimisation. "Product development is not only an R&D job. It should be a joint effort of marketing and sales teams, operating staff and potential customers," he explains. "Earlier, R&D could only develop a specialty product (without knowing the market dynamics). Now, before we take up a project, there will be a concept note on the product to be developed, potential market, estimated market share and returns. Our new researches will be demand driven."

Deven Choksey, MD of KR Choksey Shares & Securities, says the offtake of steel products will rise with the revival of the economy. "There will be demand for new products. There are two positive factors for the company - lower energy costs and the positive sentiments around India. But, the company should not scale up like the way it did earlier," he adds.

M. Venkatraman, former DRDO scientist, who spearheads Essar Steel's specialty play, says the company has developed more than 50 new products in auto, yellow goods, defence and energy segments. The steelmaker works for the prestigious India-based Neutrino Observatory (INO) Project of the Department of Atomic Energy and Department of Science and Technology, supplying magnetic steel for building neutrino detectors 1,200 metres under the rock cover in Theni and Madurai. The INO's objective is to conduct basic research on elementary particles called neutrino. Another product it has developed is the lightweight ballistic missile-resistant steel for battle tanks. "We expect commercial orders for the product, along with ultra-high strength steel for the Indian Navy," says Venkatraman.

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'Product development is not only an Research and Development job. It should be a joint effort of marketing and sales teams, operating staff and potential customers,' says FIRDOSE VANDREVALA, Vice Chairman, Essar Steel (Photo: Rachit Goswami).


It has also introduced reinforced galvanised-steel for automotive, construction and engineering segments. The steelmaker has larger presence in flat steel, hot and cold-rolled steel, galvanised steel, extra-wide plates and pipe. "The plate mill products have an order book for two years' production. The pipe mill has an order book for six months," he says.

Though value-added products fetch a premium of 15 to 25 per cent compared to (base grade) steel, the benefits will be short term, and the Essar has to stay ahead of the curve. "If you innovate a product, others will copy it with additions in a year's time. So, it is a one-year window. For being relevant in the specialty market, you need to innovate continuously," says a Tata Steel executive. In 2014/15, the company expects 30 per cent of its sales to come from its premium products, up from 25 per cent last year. "We keep bringing it up slowly. Otherwise why should we develop it?" quips Vandrevala.

Despite his efforts to create a niche for Essar Steel and ride the wave of positive developments, Vandrevala's success will depend on how global and domestic factors pan out. As long as the man and his team do not lose focus and remain prudent, and are willing to learn from past mistakes, it's good news for the beleaguered steelmaker.

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