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More clarity on talks to refinance loans for oil, steel, shipping and ports entities to emerge in a month or two; external commercial borrowing refinance a prime tool.
With a combined debt of close to Rs 80,000 crore, Essar Group companies (Essar Oil, Essar Steel, Essar Shipping, Essar Ports) are finding ways to lower these burdens. They have been reiterating that lowering debt is a major focus area. Essar Oil and Essar Steel have got the Reserve Bank's approval to raise up to Rs 8,250 crore and Rs 2,365 crore in external commercial borrowing (ECB), respectively; interest rates abroad are lower than in India and it makes sense to swap rupee dent and foreign debt.
A company spokesperson said, "As a policy, we do not comment on any specific transaction. However, we would like to add that the Essar Group continues to work on reducing the cost of debt across all its businesses, so as to align its financing costs with global levels."
Essar Steel and Essar Oil have completed their capacity expansions. They're large exporters and availing dollar financing acts as a natural hedge, with reduced interest costs and increased tenure, helping them become globally competitive.
The spokesperson said, "These efforts are neither driven by any compulsion to refinance or restructure but by the strategy of pruning financing cost as much as possible." L K Gupta, managing director, Essar Oil, in an interview with Business Standard in June this year, had said that with the 20-million tonne Vadinar refinery getting completed this year, revenue would shoot up and refinancing of loans not be an issue.
The company was then reeling under a Rs 6,000 crore sales tax notice from the Gujarat government and trying to come out of a corporate debt restructuring programme. In the quarter gone by, it has successfully came out of the CDR programme and said it might raise close to Rs 8,250 crore abroad after it got RBI's approval to do so. It is looking to raise more money overseas to rework debt.
The company even reported net profit of Rs 166 crore in the second quarter, after successive losses, and the Vadinar refinery boosted gross revenue by 67 per cent. It said, "Phase-I of the optimisation project was completed last quarter, four months ahead of planned completion. During the quarter, the Vadinar refinery processed 5.07 million tonnes (mt) of crude, up 66 per cent over the second quarter. The refinery is now functioning at full capacity of 20 mt per annum, with all units stabilised." Essar Oil had net sales of Rs 58,000 crore in 2011-12 and the Vadinar refinery has already started to show good results. Essar Steel has debt of Rs 23,500 crore and is actively scouting for opportunities to lower this number.
The company has been exploring options to borrow money from abroad, as interest rates in developed markets are lower than India. The company has RBI approval to refinance up to Rs 2,365 crore in foreign currency.
The doubling of yearly capacity to 10 mt has been completed and it hopes to achieve seven mt by the end of this financial year. With the increase, the company is hoping to service the high interest costs sitting on its books for the Rs 37,500 crore spent on the expansion. The spokesperson said, "The swapping of rupee debt with foreign debt is a beginning towards achieving this and RBI has permitted Essar Steel and Essar Oil, which have significant export potential, to avail dollar financing and repay rupee debt. This strategy will align the balance sheet to the currency of our business i.e US dollars."
Essar Shipping, which had debt of Rs 5,500 crore at end-September, is also actively looking to lower its debt burden. A R Ramakrishnan, managing director, in a recent conference call with the media, had told this newspaper the company was indeed locked-in with lenders abroad to converts rupee loans into dollar denominations and was also trying to extend the time period to repay existing loans.
He said that over the next month or two the company would have more clarity on the loan refinancing. Essar Shipping is also looking to redo loans on some of its ships, Ramakrishnan said. He, however, did not put a number on how much loan the company was looking to rework and said it depended solely on the lenders and the economic outlook.
"This is a priority for us," he reiterated. Essar Ports, with a Rs 5,601 crore loan, has knocked on the doors of RBI to allow the company to raise Rs 1,500 crore through ECB, as a special case to refinance loans. RBI has allowed manufacturing and infrastructure companies to avail of ECB to repay rupee loans if they have been a consistent foreign exchange earner for the last three years. Though Essar Ports earns its entire revenues in rupees, it has made a special appeal in this regard.
The company has already availed of the Take Out Financing scheme of the government through IIFCL and is refinancing Rs 405 crore of its debt for the Hazira port facility. This has brought down its interest cost by 2.65 per cent for the stated amount.
It is also looking to refinance close to Rs 250 crore at the Vadinar terminal through this route. Essar Ports is increasing its capacities to 158 mt by 2014-15 from the current 88 mt and its net profit for the second quarter of this financial year jumped 97 per cent because of the increased business from group companies such as Essar Oil and Essar Steel.
This business will continue to grow and with its own capacity additions, Essar Ports is looking to get at least 25 per cent of revenue from third-party cargo by 2014-15, as against a meagre four per cent currently.