Essar Steel says ‘worst times’ over, March a turnaround quarter

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Hazira (Gujarat): Contrary to market perceptions over its financial and operational performance, Essar Steel India feels its “worst times” are over and is on its way to post a turnaround in the March quarter.

Optimistic of its financial situation, the Mumbai-based company said it has already paid lenders over Rs20,000 crore in the last three-and-a-half years by way of interest and principal repayments with promoters infusing Rs9,000 crore and the balance coming through Earnings before Interest, Depreciation, Taxes and Amortization (Ebidta).

Besides, the Ruia-promoted firm—part of the oil-to-steel Essar Group—claims that it has a low debt/tonne at Rs30,000 as against the industry average of Rs35,000 per tonne.

“January-March is our turnaround quarter. The worst times are behind. See, gas prices have come to $6 per mmBtu (million British thermal units), all the critical raw material inputs are in place and the markets are responding to the government’s measures on curbing cheap imports,” said Jatinder Mehra, director of the Essar Group.

The firm claims its production has doubled since November last year and is operating at 70% capacity utilization at present resulting in an improvement in Ebidta margin, which has risen to 18-20% from 5% in November 2015.

Mehra added that the firm, which has a 10 million tonnes per annum (mtpa) steel making capacity at Hazira, Gujarat, expects to clock a capacity utilization rate of 80-85% in the financial year starting April 2016. For the entire 2015-16 fiscal, Essar Steel India expects to clock a capacity utilization rate of 50-55% as against 30-35% in 2014-15.

Speaking to reporters earlier, Essar Steel India chief executive and managing director, Dilip Oommen, said the firm’s efforts over the last few months in strengthening operations, supported by stable markets and encouraging response from customers, has given the firm confidence to aim for full production in 2016-17.

“We produced 3.64 lakh tonnes of steel last month and in March we expect to clock an output of 5 lakh tonnes. Besides, we have completed all the upstream and downstream projects at competitive costs to achieve 10 mtpa and all units have become operational,” Oommen said. The availability of gas at economic prices has enabled Essar Steel to operationalize the gas-based DRI units, which is further aided by captive gas from COREX and Blast furnace, he added.

On the company’s debt position, Essar Steel India chief financial officer Mahadev Iyer said the firm has a net debt of about Rs38,000 crore, of which Rs30,000 crore is long-term loan and the remaining is working capital. “We are comfortably placed on the debt front. Half of the long-term debt is under the Reserve Bank’s 5.25 scheme and we are in talks with the lenders to getting the remaining Rs15,000 crore under the RBI scheme,” he added. On the sale of assets to pare debt, Iyer said due to RBI clarification on firm not allowed to sell and then lease assets, the option has been discarded.

Without revealing the progress on induction of strategic investor, Iyer said, “It is still on the cards, but from this being the only option in November, it has now become one of the options for us.”

Besides, the steel industry has approached the government for a special relief package, including a year-long moratorium on interest payments, which, when operationalized, will help the industry, Iyer said. “The funds are enough at present to fund interest of banks. By March 2017, we have to pay around Rs4,100 crore towards debt and interest. Besides, the promoters will infuse Rs1,500 crore in the firm in consultation with the lenders,” Iyer explained.

On Essar Steel’s operational performance, Oommen said the introduction of minimum import price and the BIS standards is helping in curbing imports of steel at predatory prices and leading to containing oversupply situation and better sales realization in the Indian market.

Lower gas prices and other input costs have enabled the company to contain costs and improve margins, Oommen said, adding the firm’s administrative and overhead costs have come down by as much as 30%.

“Our production and sales have doubled since October last year and this month we expect a production of 5 lakh tonnes of steel. We recently won an iron ore mine in Odisha via auction with a deposit of 99 million tonnes. It will meet 50% of annual ore requirement of Paradip pellet plant,” he added.

Besides, Essar Steel India is also leveraging its retail initiative—Hypermart—to reach directly to small-time consumers. Started in 2006, Hypermart, which has stores in 38 locations and a chain of 200 franchises, has an annual sale of about 1.5 million tonnes of the metal.

“Through Hypermart we will make further inroads in rural India. We have also launched its online version—eHypermart. This will also tap small end customers,” Oommen said.

Retail accounts for 25-30% of Essar Steel India’s total sales.