Essarsteel Final)

7/31/2019 Essarsteel Final)

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Financial Restructuring

CASE STUDY ON ESSAR STEEL, HAZIRA

)Puneet Gupta

Jayashankar

Gopakumar K


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Index

Essar History & Expansion Strategy

Financial Implications

CDR and Fresh lease of life

Re-Engineering & Positioning

Road Ahead

Analysis of Q

Conclusion


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The Expansion Plan& Challenges

Foundation was laid by Nand Kishore Ruia in1956.

In 1976 Essar steel was incorporated. In 1989 ventured into exploration

Mid 90s went to Telecom

In 1987 went for a collaboration with Voest and Alpine Group for Sponge Iron

manufacturing and expansion from .9 MT to 1.6 MT. It offered 1.7M convertible

debenture for cash at par Rs 120.

In 1989 decided to add HRC plant at Hazira by borrowing funds from IDBI, ICICI

and other lenders for 7yrs repayment period

Joint venture with Stemcor for a high grade pellet plant of 3.3 mt in Vizag to exploit

the iron ores from Bailadila. Backward integration drive

21st CenturyLargest Sponge Iron producer


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Financial Troubles

Delayed project added to the woes by the cost overruns from envisaged

1394 to 4400 cr resulting in ESSAR going for FRN of $250 m.

Simultaneous launch of many projects led to liquidity crunch

The promoters met the regulatory requirement by diverting rised funds

towards the capital requirement thus loosing focus on project milestones.

Mid 90s slowdown caught Essar off guard and in deep financial distress.

1998 the firm went to a tailspin as steel prices were half and hence no cash

profit available.

High Interest Costs, High level of debt, short maturity profile of debt

D/E ratio went to 2.12 with loss mounting to 413Cr.


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Before CDR

[2001] Essar undertook a restructuring exercise

FRNs - $ 250 million5 Yr

Domestic Debtor - Rs 1900 Cr - 8% ,14Yr

Secured Creditor - $ 262 million - 5 -6 Yr

Supplier KRC LtdSkybus projects


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Corporate Debt Restructuring

CDRM package [2003] - IDBI

Extend Loan

One Time paymentobligation as disc

Debt to Rupee and due date to [2017]

Waived certain Penalty Interest, Liquidated damage , reduced IC and converted

loans to Equity.

Priority DebtUnsecured Debtors at Disc basis

FRN (250m)70 % opted for Buy back @ Discount .25 % at a fixed Coupon Rate

Secured loan One time settlement saving Rs 37 Cr


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Re-Engineering

By March 2003 over Rs 42,000 crore of stressed assets had been recast via the

CDR mechanism , including those of large steel companies - Essar Steel ,

Jindal Vijaynagar Steel and Ispat Industries

Clickforsteel.comonline sale of prime steel- mix and match at Hazaria

Efficiency and productivity increased.

Internal accrual used for stake increase in Hy-Grade leading to integrated steel

plant [ Bottom Up Integration complete]

Backward integration resulted in 30m/yr savings

Injection of oxygen in HBI modules resulted in Increased productivity from 2

to 2.2 million tons.


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Positioning

Technological measures [2005]

LNG and Naptha as feed stock.

DR grade pellets to reduce cost of production

Increased capacity at HRPO mill .

Lowest Cost producer of steel

[2006] CDR debt fully paid off in 4 Yr as for 12 Yr.

Improved Balance Sheet more access to credit

Essar had significant cost advantage over competitors.

D/E = 1.96:1 in 03 to D/E = 1.25 in 06


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Road Ahead ..

Regional Expansion planWest Asia

Qatar Steel plant ,HamriyahFree Zone , Iran

Industry 5 billion [2008]more opportunity

No Overstretching [Holdand Divest]


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Was Essar Steel repeating its mistakes by stretching

itself too thin?What should its strategy be ?

Selling closer to lowfreight areas in thedomestic market

Increasing theproportion of valueadded grades in the

sales portfolio

Rationalizing thecustomer base tooptimize orderquantity service

levels

Strategy and

Industry

Outlook


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Contd

Essar Steel is in the bottom 25% of the global cost curve

IT has the ability to use low grade iron ore fines through its own 20 million tonne pellet and

beneficiation plants which provide raw material security

Power requirements have been tied up through captive coal- and gas-based power plants

Different iron making technologies provide flexibility in raw material usage

New compact strip production (CSP) mill is capable of producing thin gauge strips of

thicknesses as low as 0.8 mm

CSP along with the hot strip mill (HSM), plate mill, pipe mill and other existing downstream

facilities offer the ability to produce the entire range of value-added flat steel products

Over 70% of the basket of products are value added, thus positively impacting margins

Caters to all customer segments


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Product Mix

Product Information [Annual Report 2006]:-

Niche marketDelphi automotive system to GM

Hot Rolled and Cold Rolled coils , sheets , plates and GV Products [ 2005]

Essar Steel became leading player of HRPO to LG,Hyundai, TM, SM etc

60% of total sales VAS like API (for oil & gas pipelines), HSLA (high

strength low alloy), IF (interstitial free steel for critical components of

automobiles), CORTEN (corrosion resistant steel), plates for Boilers and Ship

building, etc.

80 Essar Steel Hypermarts which clocked more than 1.1 lakh tonnes of sales

valued at over Rs. 350 crores.

Advanced communication tools for placing steel orders, such as mobile

messaging, and exclusive in-bound and out-bound call centers has met with

tremendous response from small customers.


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New Expansion Challenges

Profitability

ratios


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Profitability ratio and Fin analysis

(contd)

Entire CDR debt repaid through internal accruals & refinancing in 2006. Debt

equity ratio down to 1.25x

Net sales for year ending 2005 increased 74% on YoY basis whereas COGS

increased by 49%. Operating margin also increased from 23.5% to 30.6% Net margin increased from 1.6% in 2004 to 9.7% in 2005.

EPS increased from Rs 1.79 in 2004 to 11.63 in 2005.

Current Ratio improved from 1.26 from 2004 to 2.14 in 2005 meaning

company has enough liquidity to pay short term liability.

PBIT/ Capital employed has increased from 12% in 2004 to 18.15% in 2005.

End Of 2007 increased reserves from 1200 to 3000 crs


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Essar@2012

Hazira now the worlds fourth largest single location flat steel complex

Capital investment made on aper ton basis lower than global benchmarks

Raw material security and flexibility ensured through addition of new units

Hazira complex offers the full range of flat steel products catering to all customer

segments

Complemented by well-entrenched distribution network with last mile reach, as

well as world-class sustainability practices

Expansion further bolsters Essar Steels track record of being a low cost producer

Steel complex a testament to Indias infrastructure growth story


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Thank You

Documents

Essarsteel Final)