Mention the name Essar two years ago, and chances were you'd encounter a frown or a negative comment from those in the know of things in the world of business. Defaults on loans, a stalled oil refinery and losses in the flagship steel business meant that the Essar Group (turnover about Rs 14,000 crore in FY05; assets over Rs 20,000 crore) with a presence in steel, shipping, power, telecoms, oil and constructions was grappling with a host of problems ranging from the erosion of credibility to crashing market capitalisation.

Cut to May 2005. The Ruias who run Essar are now busy drawing on the lessons they have learnt from the turbulent problem years. The mission this time is clear: no tall talk, just focus on performance. Consequently, the growing public face of the Essar Group, Prashant Ruia, director on flagship Essar Steel, is more keen to show you photographs of the actual work being done at the group's various facilities, rather than dwell on plans and announcements. "There's nothing sexy, nothing grand," he says. "Just consolidate and grow the existing businesses. That's the plan," says Mr Ruia. Clearly, a case of once bitten, twice shy.

The problem years

After the mid-nineties, when additions were made to the steel capacities in India in anticipation of huge economic growth, the slowdown in the economy meant companies like Essar Steel were caught off-guard and found themselves in deep financial distress. Alongside was the problem of Essar Oil and its ambitious refinery project in Vadinar in Gujarat (now being completed at a capacity of 10.5 mmtpa) was also stuck. Consequently, the group found itself landing up at the receiving end of both investors and the financial institutions. Essar Steel went through a painful and complex corporate debt restructuring (CDR) process. Says Mr Ruia: "It was not as if bad management or wrong decisions led to the problems we faced. If you ask me now, would we have made the refinery any differently? Or the steel project any differently? The answer is clearly no. We would have still gone with the same technology. The problem was mainly a result of the industry doing badly and it told on our performance."

In many ways, the problems of Essar Steel began to hound the entire group and during the problem years the perception surrounding the entire group took a massive beating. Mr Ruia admits this: "We did suffer because Essar Steel was our flagship."

But he points out that even in the worst of times, the shipping and power businesses performed well and Essar Shipping and Essar Power never made losses. "But the big ones steel and oil were in trouble and that led to the concern in the minds of the public. However, we cannot absolve ourselves of the responsibility. The investors clearly weren't happy and the companies didn't perform," he says. The CDR mechanism, despite having its share of controversy, came at just the right time for the Essar Group. As the company's flagship Essar Steel went through the negotiations with the lenders, the industry also started gradually looking up, buoyed by the construction activity and demand from China. The result: thanks to support from the lenders, Essar Steel is back on the profit track today. "At the time of CDR, our debt in Essar Steel was Rs 6000 crore. Today, it's about Rs 3,800 crore. We've brought down our debt quite a bit."

Group overview STEEL o Hazira operations o Hot briquetted iron o Hot rolled coils o Down stream complex Vizag Operations o Pelletisation plant o Benefication plant o Slurry pipeline Indonesia Operations o Cold rolling mill SHIPPING o Oil Tankers o Bulkers o Terminal/Port Facility OIL & GAS o Exploration & production o Refining o Marketing Bulk Retail POWER o Hazira 515 MW o Jamnagar 120 MW Co-generation TELECOM & BPO o JV with Hutchison Whampoa * Hutch * Orange o BPO * Customer solutions * Call centres CONSTRUCTION o EPC Contractor The company's full year results for FY05 show a 65% increase in total income (net of excise) to Rs 6121.27 crore. Net profit stood at Rs 590.15 crore, up from Rs 59.99 crore the previous fiscal. "In many ways, the Essar Steel results for the full year reflect the results of the hard work which has been put in during the troubled phase," explains Mr Ruia. And the bullishness for the future is also outlined by his father, Shashi, who said after the results: "Demand continues to be bullish and we are putting in place a number of measures to remain one of the lowest cost producers in the country."

Consolidation gameplan

Today, the Essar Group is busy putting in place a detailed plan on the steel front, which would see it consolidate its position in the industry. On the anvil is the move to hike steel capacity at Hazira to 4.6 million tonne, for which the group is shelling out Rs 2000 crore by way of capital expenditure. This year, the capacity will be upped to 3 mt from 2.4 mt. Alongside, the group is buying out the 51% Stemcor stake in Visakhapatnam-based joint venture Hy-Grade Pellets and 100% stake of Stemcor in Steel Corporation of Gujarat. The expansion and stake buys will help them integrate the steel operations and also bring down their cost of production substantially. The Essar strategy, Mr Ruia says, is to bring down costs by expanding right away. Would the several steel projects being planned over the next few years not lead to yet another glut in the steel sector? Mr Ruia is candid: "I'd say if all the projects which are being announced actually come up, then we would surely be in for a glut. But I am not sure that all of them will actually happen."

On the power front, the group is lining up another expansion, at a Rs 4,000 crore expenditure. Essar Power's capacity, at 515 MW, is being hiked by another 1500 MW, for which financing plans are being worked out. "These should be ready over the next two-three months," says Mr Ruia. And the refinery, too, is progressing at a healthy pace.

Alongside, the Essar Group's petroleum retailing plan inextricably linked with that of the refinery is being rolled out. While there are murmurs of a delay in the rollout of petroleum retailing outlets, Mr Ruia says the plan anyway was to have 2000 outlets by the time the refinery is up and running. Currently, over 500 are in place. "The petroleum retailing plan is progressing as scheduled. We will have 2000 outlets by third quarter next year. In any case, we don't want to hurry too much without having the product in place," explains Mr Ruia.

"In shipping, there's a bit of a lull since we sold a few of our ships to take advantage of the market. We don't think this is the right time to buy, and are waiting." Market signals Is the stockmarket taking stock of the consolidation going on at the group? Does the market still doubt whether the Essar plan will actually succeed?

Clearly, Mr Ruia thinks the market is understanding the work going on at the group. "Our market cap has risen 700% over the past year and a half," he says. But, given the fact that the group is in businesses which are witnessing high growth, it still doesn't figure anywhere near the top levels of market capitalisation.

"But stocks which were quoting around Rs 10 earlier have now touched Rs 35-40. I think the realisation in the market is coming. We have to perform." he points out. "Today, the market cap of our group has moved up from the Rs 2,000-3,000 crore range to about Rs 14,000 crore."

Figures, however, show the market is still taking its time on Essar and may need a little more convincing. Between January 3 and May 25, the Essar Oil stock gained 12.2%, while Essar Shipping actually lost 3.1%. Essar Steel, on the other hand saw a 4% increase between January 3 and April 22, after which the stock has been suspended owing to the company's capital reduction plan.

What next?

With the turnaround in the steel industry and the boom in shipping, the group is now happy to continue riding the economic growth story. Alongside, its 33% stake in the consolidated telecom company Hutchison Essar Ltd makes it a serious telecom investor as well. And the group has also bid for seven more telecom licenses on its own. With the consolidation having taken place in Hutchison Essar, the group is now awaiting the Hutch IPO which is slated for later this year. The 33% stake gives Essar enough play in the booming telecom business. And despite the fact that the group has bid for the new licenses independently, Mr Ruia says: "Don't read too much into the fact that we've gone for the licenses independently. These are only licenses." It has also signed a production sharing contract with the Myanmar government for oil exploration in two blocks. The sheer size of the refinery business will propel group turnover by another Rs 14,000 crore or thereabouts once the full benefits of the project accrue. And most important, Mr Ruia claims, the lenders are happy. "I'd gauge lender mood by two things: are they wanting their money back and are they willing to lend me more. They clearly don't want their money back and they're willing to lend more. But that doesn't mean we won't be responsible in what we do," says he.

Do the Industrial Development Bank of India-led lenders buy the Essar comeback story now? Says a senior institutional official associated with the Essar CDR case: "They are surely on the turnaround path. The future looks good as all the businesses they are in are booming right now."

While things have only just begun looking up, there's a lot of work still to be done, and the now-cautious Ruias know that. However, clearly satisfied with the way things are going, Mr Ruia says: "The good thing is that it has been proved that the steel, power and shipping assets we invested in are world class. That was earlier being doubted. And it has taken two long years for people to say that our problems are now in the past." The group will now be hoping it remains that way.