The Ruias of Essar group are betting on Essar Oil to bail out other group companies which need cash to service their debt. Bankers say that the group’s flagship Essar Oil has lent close to Rs 7,500 crore to other group companies in fiscal 2015 so that they can service the loans which were due in March, even as an analysis of its financial metrics show a steady decline in the group’s financial health led by poor show of its steel and power businesses.
Bankers also say that the group’s consolidated debt is set to cross Rs 120,000 crore in the fiscal ended March, 2015 while annual interest liability is likely to top Rs 12,000 crore. In comparison, the eight group companies whose figures were available reported combined debt of Rs 92,500 crore at the end of FY14 and interest liability of Rs 10,410 crore. However, this doesn’t include the figures for Essar Power whose numbers are only available till March 2012. In that year, the company has reported debt of Rs 19,600 crore.
In the FY15, Essar Oil pumped in Rs 3,125 crore in Essar Power in two transactions. The company acquired 10.25 per cent cumulative redeemable preference shares of Essar Power worth Rs 1,025 crore from Essar House, a promoter entity. Secondly, it bought equity and participating preference shares of Vadinar Power Company from Essar Power worth Rs 2,100 crore.
When contacted, Suresh Jain, Chief Financial Officer, of Essar Oil, did not want to go into specifics, but said: “We took over Vadinar Power and Vadinar Properties from other group entities and paid advances to owners of these companies. These two transactions are included in the advances given to group companies.” The loans & advances of Essar Oil for FY 2014 were Rs 7,000 crore of which Rs 5,500 crore were lent to group companies. The transactions to buy out Vadinar Power and Vadinar Properties were cleared by minority shareholders and other relevent authorities, Jain said.
The continued poor show by non-oil business of the group has made bankers jittery. “We are realizing that it’s getting tough for the group as its ports, power and steel projects are languishing and are unable to generate adequate cash flow from operations. We are now asking the group to sell assets but there are no takers as the valuations expected by the promoters’ is too high,” says a banker. “As a lot of loans were due on March 31, Essar Oil, which is doing well in cash flow terms, has stepped in to repay the loans,” he said.
In the nine months ending December 2014, Essar Oil reported net profit of Rs 976 crore and cash profit of Rs 1505 crore. According to the company’s official, its debt declined to around Rs 17,000 crore at the end of December 2014 from around Rs 24,000 crore as on March 2014.
While Essar Oil is showing signs of a revival, other group companies like steel and power are still languishing. With bankers seeking repayment on time, the group now wants to sell off its port and part of its stake in oil refinery. The port gets a lot of captive business from the steel company but as steel production is low due to a slowdown in the economy, it is also under pressure. The company’s listed port entity, Essar Port made a profit of Rs 98 crore on revenues of Rs 435 crore on consolidated basis, as per Bombay Stock Exchange data. The group has denied any stake sale.
Essar Steel, the group’s most indebted firm, had a total debt of Rs 46,146 crore at the end of FY14 including non-borrowed liabilities such as deferred tax liabilities. The companies leverage ratio shot up to 20 from nine a year ago due to mounting losses from operations. (see table).
Things are little better at Essar Oil, group’s biggest company by revenues though it faces challenge from a global slump in energy prices and refining margins. The companies had a total debt of Rs 22,000 crore at the end of September 2015. The management predict better financial ratios for the fiscal year ending March 2015.
The company’s debt to equity ratio improved to 5.4 at the end of September 2014 from 9.7 at the end of March 2014 and interest coverage ratio improved to 2.2, much higher than the danger mark of 1.5. With promoters investing Rs 1,500 crore as equity, its debt to equity ratio is expected to get better. The interest coverage ratio (ICR) is calculated by dividing a company’s operating profit of a period by the company's interest expenses of the same period and it shows how easily a company can pay interest expenses on its debt.
In all the eight Essar group companies, whose figures were available for FY14 together owned debt worth around Rs 92,000 crore with group level debt to equity ratio of 5.2, up from 4.7 at the end of FY13. The group’s combined interest coverage ratio was only 1.2 at the end of last fiscal (FY2014) below the desired level.
This has made the group to rely on Essar Oil to keep its operations running as banker get cagey to offer more loans to other group companies.
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