Through the 1990s, Ruia brothers Ravikant and Shashikant were among a clutch of entrepreneurs who had ridden the early opportunities of economic liberalisation and rapidly expanded their balancesheets to become conglomerates. Now, as the Ruias move out of Essar Oil following a mammoth $12.9-billion sale to Russian giant Rosneft last month and face insolvency proceedings for Essar Steel, the group has become a much leaner version of its 90s avatar.
From an oil-to-telecom giant, the group remains in power, shipping, oilfield services and financial services. But Prashant Ruia, 48, the older son of Shashikant Ruia, insists that the downsizing is over and the focus now is on maximising operational efficiencies, “either from higher unit realisation or from superior cost management”.
As he likes to point out, the group will post revenue of around $15 billion in 2017-18, keeping the group “comfortably among the top five business conglomerates in India”.
He describes the Rosneft sale, which reduced the group’s mammoth Rs 1.12 crore debt by Rs 70,000 crore, as marking the end of the group’s “monetisation” programme (he describes it as the “single largest deleveraging in Indian corporate history”).
In April this year, Essar Global exited the business process outsourcing (BPO) after it sold off US-based Aegis to Capital Square Partners, a Singapore-based private equity fund. In 2011, it moved out of telecommunication by selling its remaining 33 per cent stake in Essar-Vodafone for $5 billion.
What has now gone off its hands and is partially owned by Russia’s state-owned Rosneft is the 20-million tonne refinery in Vadinar, Gujarat, 3,500 retail outlets and associated refinery infrastructure. A port of 58-million tonne capacity and a 1,010-Mw power plant at Vadinar, too, are now owned by a Rosneft-led consortium. This would shave off about 80 per cent of the group’s topline.
The Russian state-owned company, through its subsidiary, Petrol Complex Pte, has acquired 49.13 per cent stake in Essar Oil. Trafigura, a leading global commodities trader, and Russian private equity investor UCP consortium, through Kesani Enterprises Company, have bought an equal stake. The remaining 1.74 per cent stake in Essar Oil continues to be held by retail shareholders.
“With the monetisation behind us and the investment cycle complete, Essar will now focus on operational expenditure where it will invest only strategically to extract larger efficiencies from the operating assets. Essar will not stop investing,” he says. As part of this strategy, the group has announced a $250-million investment to enhance production in the UK-based Stanlow refinery, which it retains after signing a non-compete clause with Rosneft.
The Stanlow refinery meets about 11 per cent of UK’s transport fuel demand, is the only one that is owned and operated overseas by an Indian group. In the hydrocarbon sector, Essar has over 2,700 square kilometre of coal bed methane acreage across five blocks, one of the largest in the country, with one tcf of in-place reserves.
For all that, the group’s immediate concerns will be the Rs 20,000-crore Essar Steel. Before the Rosneft deal was announced on August 21, the National Company Law Tribunal (NCLT) on August 2 dissolved the Essar Steel board. This company owed lenders around Rs 40,000 crore, of which Rs 31,671 crore turned into non-performing assets as on March 31, 2016. Proceeds from the Rosneft deal will not be used to pay down Essar Steel’s debt.
Among the 12 companies that the Reserve Bank of India (RBI) asked banks to put on fast track for insolvency, Essar Steel was the only one to take the central bank to court for what it termed was an “unreasonable, arbitrary and irrational exercise of its powers”. Though its petition was rejected by the Gujarat High Court, the company continued to oppose the insolvency petition of its lenders, State Bank of India and Standard Chartered Bank, at the NCLT.
Essar’s reasons for opposing insolvency is that the management was close to arriving at a restructuring package with its lenders, with most substantive issues being agreed upon, says Ruia, who is director of Essar Capital, another group company. Ruia has served as managing director of Essar Steel and was a director on its board till its dissolution. As he explains, “Certain smaller issues remained to be signed off on. In fact, the creditor banks were awaiting guidance from the RBI towards appointing an empowered oversight committee to see the restructuring programme through. Unfortunately, on June 13, 2017, the RBI came out with a specific directive to banks to refer 12 cases to the NCLT. Essar Steel was one of them.”
Unlike Essar Oil, the Ruias are unwilling to exit the steel business. “We would like to reaffirm our commitment to the steel business, which we have assiduously built into a worldclass asset against all odds. We will follow the due process of law and will bid (for Essar Steel as part of insolvency resolution process) accordingly,” Ruia reiterates.
The group’s current consolidation, largely forced by its debt burden, was preceded by delisting of its companies in India and even on London Stock Exchange. Its only listed entity on the BSE is Essar Shipping; ironically it is also one of its first businesses, started in 1969 as a marine construction, offshore drilling and shipping business. Its maritime business, including ports, and power are now its mainstay.
The marine transportation business has a diversified fleet of 14 vessels with a combined tonnage of over 1.68 million. Essar Shipping, through its subsidiaries, Essar Oilfields Services and Essar Oilfield Services (India), is into onshore and offshore drilling and related services and owns a fleet of 16 rigs.
In power, Essar currently has seven operational power plants in India and one operational power plant in Algoma, Canada, with a total installed generation capacity of 5,000 Mw of which around 3,600 Mw is operational.
With the Mahan power plant, Madhya Pradesh, starting operations last month, Ruia says the group considers the investment cycle complete and it is now on the look-out for opportunities.
Ruia says the sell-offs were of a piece with its philosophy of conceiving and building assets to world-class levels and monetising them at the right time and at the right valuation. He points out that when Essar first sold its stake in Vodafone Essar for $5 billion in 2011, it used the proceeds to fund a massive $18 billion expansion across its businesses. Clearly, the group sees no reason to be chastened by its recent travails.