Billionaire Anil Agarwal’s Vedanta Ltd is seeking to sell ESL Steel Ltd, formerly known as Electrosteel Steels Ltd, after acquiring the asset for ₹5,320 crore through a bankruptcy resolution process five years ago, two people familiar with the development said.
A previous attempt to sell the asset in late December failed as certain approvals, including environmental clearance and expansion plan, were still pending, turning prospective buyers cautious.
The mandate for selling the asset in Bokaro, Jharkhand, is with bankers including Citigroup and JPMorgan’s India offices, the people said, on condition of anonymity. The mandate may also include the iron ore mines in Goa and Karnataka, they said, adding that the details and contours of the asset will be known by mid-August. The price tag for ESL and the iron ore assets would be between $2 billion and $3 billion, the people said on condition of anonymity.
Although Agarwal, on numerous occasions, alluded to the focus of his group on non-ferrous metals, such as aluminium, zinc, and copper, the group entered the ferrous metal sector when it aggressively bid for stressed steel assets.
Since the change of ownership, ESL has been in recovery mode, recording its highest production in FY23. ESL also increased its hot metal capacity to 1.7 million tonnes and has plans to expand to 3 million tonnes by early FY25.
For Agarwal, who is in the middle of reorganizing the group’s zinc businesses and expanding its aluminium business, in addition to harbouring ambitions of setting up a semiconductor plant, it’s lately realized that it has to focus on core businesses and monetizing assets that are not core to his group.
Also, Vedanta Resources Plc, Vedanta Ltd’s parent and the holding company of the group, is staring at a bond redemption of $2.1 billion in FY24 and an additional $3 billion in FY25. An analyst tracking the group said the steel asset sale would probably help repay its parent’s debt and allow for a fresh infusion of funds for capital expenditure. Agarwal has rarely sold a business, and that he has decided to sell the steel business needs to be seen in that light.
An email query to a spokesperson for Vedanta Ltd went unanswered. While a spokesperson for Citigroup in India declined to comment, JPMorgan didn’t respond to an emailed query.
Founded in 2006, ESL, based in Bokaro, was acquired by Vedanta in June 2018 through an insolvency resolution at Kolkata, marking Agarwal’s entry into the steel business. ESL, with a greenfield manufacturing facility, is primarily engaged in the production of TMT bars, DI pipes, wire rods, billets, and pig iron.
Soon after the acquisition, Vedanta pumped in $300 million to augment ESL’s capacity from 1.5 million tonnes (mt) to 2.5 mt, following which the company turned profitable within a year of the acquisition, i.e. in 2019.
In an interview with Business Standard in December, Anil Agarwal, when asked about the rumoured sale, said: “We have not arrived at a decision. In any business, I tell my CEOs (chief executive officers) that we have to be in the top three. We have to have a vision. Increase the capacity because we are in a beautiful state, Jharkhand, which is my home state. But it has to have world-class capacity and cannot be a small plant. We have a capacity of about 3 mt… we are contemplating. We have to take it to 15-20 mt. We are either in that business or we are not.”
Environmental clearance was a stumbling block for the sale. But, one of the people cited above said this hurdle is likely to be overcome as clearance is likely soon.
In its FY23 annual report, Vedanta’s CEO Sunil Duggal wrote to shareholders of ESL’s progress: “ESL performed resiliently amidst challenges that were used as an opportunity to be future-ready by undertaking yield improvement, debottlenecking and plant maintenance initiatives.”
ESL registered an increase in saleable production to 1,285 kilotonne (kt) with the highest-ever net sales realization, resulting in favourable operating margins. It continued to prioritize its value-added portfolio, resulting in a 5% increase in its sales. ESL successfully operationalized two iron ore mines with 100% captive sourcing of iron ore.
ESL has its own sinter plants, blast furnaces, coke oven, oxygen plant, billet caster, wire rod mill, bar mill, ductile iron pipes plant, and a power plant.
In December 2018, Agarwal said Vedanta would scale up its steel business to 7 mt per annum by setting up a new steel plant in Jharkhand with a capacity of 4.5 mt per annum at an investment of $3-4 billion. The plant was supposed to be a part of ESL at Bokaro.
If the latest ESL sale deal is consummated, it may help Vedanta pay a better dividend to its shareholders, including its London-based parent Vedanta Resources Plc, which holds 68.11% of the Indian company. This will enable the latter to meet its looming debt obligations. Vedanta Resources has paid down around $2 billion of its debt during fiscal year 2022-23, a Moody’s report said. Its cash needs for the fiscal year ending March 2024 include cross-border bonds of $900 million, a $1 billion bond maturing in January 2024, an estimated $1.1 billion in term debt; $450 million of an intercompany loan; and an estimated interest bill of at least $600 million to be paid by March 2024, according to Moody’s.
Vedanta Resources received around Rs. 25,698.3 crore from Vedanta Ltd’s dividend payout in FY23, and Rs.20,710.8 crore from Hindustan Zinc Ltd. (another subsidiary in which Vedanta Resources hold 64.92%)
However, credit raters have raised concerns over Vedanta Resources’ ability to service debt. On 10 March, Moody’s downgraded Vedanta Resources over a likelihood of payments default.