India: ESSAR Steel becomes fourth largest single location flat steel producer

Essar Steel India has successfully completed the expansion of its steel manufacturing capacity from 4.6 Metric Ton Per Annum (MTPA) to 10 MTPA. It is now the 4th largest single location flat steel producer and a highly cost competitive in the bottom quartile of the global steel 

The company has been focusing on exports and is one of the biggest foreign exchange earners in India through export of steel products. Steel product prices in the international markets and domestic markets show a very high degree of correlation. As a result even though the domestic sales revenues are realized in Indian rupee, the pricing methodology of the same is based on the landed cost of imported steel, which in turn is based on a dollar rate.

In line with this strategy to de-risk its balance sheet, Essar Steel also announced raising USD one billion via external commercial borrowings (ECBs) at a competitive London Interbank Offered Rate (LIBOR) linked pricing.        

Consequently, the average maturity of its debt or in other words the door to door maturity has nearly doubled. The dollar debt has an average maturity of seven years. The earnings, being dollar linked, would serve as a natural hedge to reduce the risks associated with currency fluctuations.

As a result of the dollarizing its rupee debt, the company will also save around Rs 450 crore per annum toward interest payment.

The company will also gain significantly in terms of additional liquidity and substantial savings in interest cost. As on date, substantial debt of the company is rupee denominated as against 30- 40 percent in peer steel companies in India. 

Commenting on this development, Ashutosh Agarwala, chief financial officer (CFO), Essar Steel India said, “Steel industry globally is going through a phase of weak demand resulting in lower realizations. It is imperative that the debt of the company is aligned to the earning currency thereby reducing volatility in earnings. The dollarization of rupee debt would not only de-risk our balance sheet, but also elongate maturity and reduce interest costs.”     

Sourced