The energy-to-construction conglomerate is back with a change in mindset and strategy. Will the transformation work?
A new energy is driving the Essar Group, which has seen a resurrection after being taken to the brink of bankruptcy. Thanks to the bitter lessons learnt from the past, Essar 2.0 is very different, even though the core focus remains the same.
What’s Different
The business approach has changed in several ways.
One, no relying on debt now. This is understandable because it was overleveraging that brought down the group. It plans to execute and implement projects through partnerships, and raise funds through debt securities.
Two, it is looking at an asset light model. The Essar group of the past was asset heavy with total ownership of all the infrastructure in its portfolio. It still has assets, but it is executing them with partners. What Essar brings to the table in many of its projects is its expertise, skills, and experience in the sectors, says a company insider. s an example of the above two, in February the group announced a $3.6 billion investment by Essar Energy Transition in low carbon energy transition projects. This investment will be done over a period of five years and more importantly, it will take on a partner who will provide a considerable portion of the equity.
Three, the owners — the Ruia family with Prashant Ruia in the driver’s seat — prefer to think of themselves as investors rather than promoters. The change in mindset is expected to result in a focus on returns and on shareholder interest. This is a major departure from the self-centric ‘ Lala’ mindset of the past that family-owned businesses typically display.
Four, risk mitigation has become a key strategy for the company, and it has also appointed a Chief Risk Officer. The company has de-risked its operations by spreading them across India, the UK, the US, Vietnam, and Saudi Arabia. In fact it is focusing more on England than on its home turf. Of the $3.6 billion propoed investment, two-thirds are earmarked for the UK.
Energy remains the core
Energy was the focus of the old Essar, and it remains so. “We’ve been involved in the energy sector for the last 30 years… the idea is to remain focused on energy,” says Prashant Ruia.
The difference is in the technologies. Its earlier focus on energy was through refineries, exploration, production, downstream and retail in effect the entire value chain.
The theme has changed to decarbonisation, investing in innovative technologies to deliver green and clean energies through renewable sources. “The idea is to remain focused on the value chain but with future technologies,” says Ruia.
The group is therefore undertaking a blue hydrogen project in the UK, through its joint venture Vertex, developing a green ammonia import terminal in the UK and checking the feasibility of a green ammonia project in India too.
Along with energy, it will continue to play in infrastructure and logistics, metals and mining, technlogy and retail. But again the focus will be on decarbonisation, decentralisation, and digitisation to be more in sync with the current discourse of sustainability.
“We don’t believe that any of the requirements for any of the sectors has changed,” Ruia points out.
Essar Oil’s UK Stanlow Refinery
Essar Oil’s UK Stanlow Refinery
Steeling itself anew
It was the ambitious steel plant in Hazira that triggered the downfall in Essar’s fortunes. Putting behind that debacle, the group is back in the steel business but it is hedging its bets across the US (Minnesota), India (Odisha) and the Middle East (Saudi Arabia) from pellets to finished steel with a total investment of around $8 billion.
The group is investing about $4 billion on an integrated flat steelwork in Saudi Arabia, which is scheduled for commission by the end of 2025, subject to getting gas linkages in place. After having relinquished Essar Steel to ArcelorMittal in 2019, this is a fresh foray in steel.
The group has also annunced an investment of $1.5 billion in Odisha, where it intends to set up an iron ore pellet plant and is expected to commence in about 30 months. The project is awaiting land allocation. The third project, Mesabi Metallics is in the US, where it is building a pellet project. It has already invested about $1.5 billion so far.
Given an expected rebound in steel, it’s a strategic investment. As Manish Chowdhury, Head of Research, Stoxbox says, “With a contraction in global steel production in 2022, we expect a rebound in steel production led by India and a likely turnaround in the US and Europe. India is likely to be a bright spot in the global context due to robust domestic demand evidenced from the government’s continued support to shore up the infrastructure sector, and a higher scope for exports due to significant capacity shutdowns in China.”
Adds Chowdhury, “We also believe that Essar Steel is trying to capture the large opportunity emanating from the infrastructure needs of the arthquake-hit Turkey and Syria, and the large export possibility from the Middle East due to its location advantage by setting up a plant in Saudi Arabia.
The challenges
Despite the flurry of projects and big investments announced, insiders say the group has learnt from the past and is taking things slowly. Most of the big investments are spread over a period of several years. “Essar is looking at slow and stable growth,” said a key Ruia aide.
There is also the question of funding. While it is banking on partnerships to take care of majority of the funding, bank loans are not entirely out of the equation.
Indian banks, who had to take a substantial haircut on their exposure to Essar Steel, are understandably not queuing up to offer loans to the group.
A former banker from one of Essar’s erstwhile lenders said that banks had become extremely risk averse when it came to lending to companies that had defaulted in the past. “It’s not that they will not lend. But approvals may probably ake longer, and they will be more cautious,” he said.
If required, the group may access the debt market through the issue of debentures or bonds either in India or overseas. Or get loans from overseas institutions.
Foreign lenders are more concerned with the business aspects and their potential.
Despite the reverses it has suffered, and the challenges, the Essar Group seems determined to stay. Its existing businesses have already generated $15 billion in revenue and an EBITDA of $1 billion. A substantial portion of the revenue — around $11 billion — came from its Stanlow Terminal in the UK, an independent bulk liquid storage business with 3 million cubic metres of capacity. The Essar group holds port assets in India and the UK, and some power and energy assets.
Its future will depend a lot on whether the new approach works or not.
(With inputs from Rishi Ranjan Kala and Suresh P Iyengar)