Bloomberg News

Essar Sees $35 Billion Sales on Singh Investment Pledge

June 13, 2012

Essar Group, owned by billionaire brothers Shashi and Ravi Ruia, is targeting $35 billion in revenue in three years as it taps demand for infrastructure in Asia’s third-largest economy.

Sales may rise 30 percent by 2015 from $27 billion in the year ended March 31, Chief Executive Officer Prashant Ruia said in an interview in Mumbai. The group also plans to exit the telecommunications business and sell stakes in a U.S. steel unit and a business process outsourcing company, he said.

Essar Group’s plans depend on Prime Minister Manmohan Singh’s ability to revive construction of roads, ports and power plants needed to spur an economy expanding at the slowest pace in almost a decade. Increased spending in infrastructure may enable Essar, which invested $18 billion in adding capacity since 2008, to widen profit margins, Ruia said.

“Over the next two to three years, we are focusing on sweating the assets which will result in a significant volume and margin growth,” Ruia, 43, said in his Mumbai headquarters. “With no major capital expenditure planned, these companies will have significant free cash flows to redeploy.”

Essar’s investments have come at a cost lower than the industry average, leaving the group with less debt than competitors with similar expansion plans, Ruia said. The total debt at Essar Energy Plc (ESSR), Essar Oil Ltd. (ESOIL) and Essar Steel Ltd. stood at $13 billion, according to data compiled by Bloomberg.

‘Strong Earnings’

Rival Reliance Industries Ltd. (RIL), owner of the world’s largest oil-refining complex, plans to invest 1 trillion rupees ($18 billion) in India in the next five years to double operating profit, Chairman Mukesh Ambani said June 7 at a shareholder meeting in Mumbai.

India’s gross domestic product rose 5.3 percent last quarter from a year earlier, compared with India’s aim of 9 percent annual expansion and $1 trillion infrastructure spending from 2012 to 2017.

Slow implementation of policy measures prompted Standard & Poor’s to cut India’s credit outlook to negative from stable in April. This week the rating company said India may become the first BRIC nation to lose its investment-grade credit rating.

“India has the potential to absorb a trillion dollar investment in infrastructure and this is not an impossible task provided the government takes proactive measures,” said U.R. Bhat, managing director at Dalton Capital Advisors India. “While such huge investments will help big business houses, the trickle-down effect is going to benefit many more.”

Stake Sales

Essar Group is in talks to sell a stake in outsourcing company Aegis Ltd., Ruia said on June 11, without giving details. The group, which bought Minnesota Steel Industries LLC for an undisclosed price, is in talks with banks for an initial public offering for the U.S. steel unit, he said.

The group may also acquire small iron ore and coal mines to gain raw material supplies for its ventures, Ruia said.

Essar Oil, India’s second-largest non-state refiner, plans to sell shares and borrow from banks to raise about $1.4 billion to refinance loans and pay pending taxes on fuel sales, Chief Executive Officer Lalit Kumar Gupta said April 17.

Essar Oil, which posted a record loss in the three months ended Dec. 31, rose 1.1 percent to 53.95 rupees, the highest level in a week. The shares have climbed 7 percent this year, lagging behind a 9 percent gain in the benchmark Sensitive Index. Parent Essar Energy fell as much as 4 percent to 112 pence and traded at 114.10 pence as of 11:45 a.m. in London.

Earnings before interest, tax and depreciation and amortization at Essar Oil may double to 46.85 billion rupees in the year ending March 31, Goldman Sachs Group Inc. analysts Vikas S. Jain, Nilesh Banerjee and Siddharth Banerjee said in a May 4 report. The investment bank, which recommends a buy on the stock, expects operating cash flows to triple to about $1.2 billion by the end of the next fiscal year.

Oil Refinery

Essar Oil spent 240 billion rupees to build an annual 20 million ton refinery at Vadinar in Gujarat, it said in a statement on June 5. The project was set up at a capital cost of $12,746 a barrel, half the global average, it said.

Essar Energy last year bought Royal Dutch Shell Plc (RDSA)’s Stanlow refinery and other associated assets for $350 million in cash and paid an additional $916 million for the oil stockpile. The power unit of Essar Energy will raise capacity to 6,700 megawatts by the end of the next fiscal year from an estimated 4,800 megawatts, the company said last month.

The majority of the equity investments for the capital expenditure were made without accessing the markets, Ruia said. Essar raised 1.27 billion pounds ($2 billion) from an initial public offering of Essar Energy in May 2010.

The group, which last year sold its 33 percent stake in Vodafone Essar for $5.46 billion, plans to exit telecommunications, Ruia said, without giving details. The company operates a mobile-phone service in Kenya, where it has 2.3 million subscribers and runs a chain of 1,000 stores selling phones in India, according to its website.

Phone Case

The group’s executives have been embroiled in a case involving a government minister and businessmen accused of conspiring to award phone permits to ineligible companies.

An Indian court on May 25 charged Essar Director Vikash Saraf for cheating and conspiracy related to documents filed to obtain mobile-phone permits. The court also charged Ravi Ruia, director Anshuman Ruia and two executives of Loop Telecom Ltd. for conspiring with Saraf in the 2008 sale of wireless licenses.

Loop was used by Essar to secure additional spectrum and licenses in contravention of policy, according to charges filed by India’s federal investigative agency. Essar denies the allegations against the company and its officials.

Essar Steel, India’s largest unlisted producer of the alloy, is expanding capacity. Demand may rise 8 percent this fiscal year after the nation’s central bank cut interest rates to boost growth, G.K. Basak, executive secretary at the steel ministry’s joint plant committee, said April 17.

Essar Steel spent 375 billion rupees to set up a 10 million ton factory in the western state of Gujarat, Ruia said. The plant will produce sheets used in making cars and home appliances.

Rail, Ports

Prime Minister Singh on June 6 outlined port projects worth about $6.3 billion for the financial year through March 2013, an investment target of $3.6 billion for Mumbai’s elevated rail corridor and plans to add airports. It also set goals of building 9,500 kilometers (5,904 miles) of roads in the 12-month period, up 18.7 percent from last year, and adding about 18,000 megawatts of power generation capacity.

“The demand in India continues to be strong,” Ruia said. “Majority of our assets are focused on meeting the domestic demand.”

To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Abhishek Shanker in Mumbai at ashanker1@bloomberg.net

To contact the editors responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net


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