Vedanta Group in talks with several bidders to sell Electrosteel Steels Limited

Vedanta beat Tata Steel, whose facilities are next to Electrosteel, to take over ESL for Rs 5,320 crore in the summer of 2018 after the creditors took the ailing steelmaker to the insolvency process

Four years after scooping up Electrosteel Steels Limited to make a big splash in the steel industry, Anil Agarwal-led Vedanta Group has decided to sell the business to focus on its core mining and industrial businesses and deleverage the balance sheet which had a debt of $11.7 billion at March-end.

The Vedanta group has approached steel companies such as ArcelorMittal Nippon Steel (AMNS), Tata Steel, JSW and Jindal Steel, and Power Limited, and a select group of financial investors said the people. Top executives like ArcelorMittal CEO Aditya Mittal have also visited the site along with Vedanta Group officials in recent weeks, they said.

Vedanta beat Tata Steel, whose facilities are next to Electrosteel, to take over ESL for Rs 5,320 crore in the summer of 2018 after the creditors took the ailing steelmaker to the insolvency process, and it became the second steel company to see the completion of the bankruptcy process after Tata Steel took control of Bhushan Steel in April 2018.

Vedanta had said at the time that the acquisition will complement its existing iron ore business as the vertical integration of steel manufacturing capabilities has the potential to generate significant efficiencies. Electrosteel Steel was a subsidiary of Electrosteel Castings. Upon taking over, Vedanta delisted the company.

Vedanta Limited (VDL), the Indian operating company which houses the diversified portfolio of oil and gas, zinc, lead, silver, aluminum, iron ore, steel, and power businesses, owns 95.5% of ESL Steel. Vedanta Resources (VRL) is the London headquartered parent of Vedanta Limited and owns 69.7% of the subsidiary. Agarwal’s family investment vehicle, Volcan, in turn, owns 100% of VRL. The company portfolio includes pig iron, TMT bars, billets, ductile iron pipes, and wire rods.

Electrosteel Steels had a planned steel-making capacity of 2.51 million tonnes and a commissioned capacity of 1.5 million tonnes in 2018. Under Vedanta, the company has launched a massive expansion in Bokaro and Goa, and a greenfield unit in Bellary, Karnataka. The company has announced a $348 million capex investment to double the hot metal capacity to 3 million tonnes per annum (MTPA) from the current 1.5 MTPA, expected to be completed in this financial year. With 12 MTPA of iron ore, the focus has been on value-added products for margin expansion.

Vedanta’s asking price has more than doubled and the company is looking at a Rs 10,500-12,000 crore valuation, said people in the know. The premium is expected to be a potential deal-breaker, they said.

“At multiple times, several players have approached Agarwal for Electrosteel but he’s never openly admitted he is a seller. The stress is mounting yet again. Electrosteel also has environmental issues which it has promised it will sort out before the transaction is consummated but the ask is too high at a time when we are seeing a squeeze in the credit markets,” said an industry veteran, who did not wish to be identified. “However, for those looking at a footprint in the east, this would be a good buy as the company has also been expanding operations.”

In September, AMNS(ArcelorMittal Nippon Steel)  for example, announced a $1 billion investment in the downstream sector to focus on specialty steel. The capex was meant for expansion at the Hazira plant (formerly Essar Steel), coke oven plants, and acquisitions like Uttam Galva (1.2 MTPA).

Vedanta Woes

On October 31, Moody’s Investors Service downgraded the corporate family rating (CFR) as well as its senior unsecured bonds issued by the indebted VRL. The outlook on the ratings remains negative. Subsequently, on November 3, VRL said in a statement that it is discontinuing its engagement with the rating agency. VRL has also asked Moody’s to withdraw all the outstanding ratings.

“The negative outlook reflects the company’s persistently weak liquidity profile and our concerns over the elevated refinancing risk arising from Holdco VRL’s looming debt maturities,” Moody’s said in the note on November 7.

However, some analysts said the worst is behind the group. “VDL paid a dividend of Rs 51 per share in the first half of 2022-23, which has resulted in debt reduction of $1.4 billion (to $8.3 billion) at the parent VRL level. At VDL level, the net debt increased by $0.5 billion quarter-on-quarter to $3.9 billion. The company has also revised down its capex guidance from $2 billion to $1.6 billion for 2022-23, primarily on the back of reduced capex in the aluminum segment,” said Pinakin Parekh, an analyst with JP Morgan India.

VRL’s notes of $900 million are due in early 2023. Agarwal, 68, is hardly new to confronting skittish investors. The company’s bond yields climbed to double digits in 2020. However, a recovery in profits driven by a commodity super cycle after the pandemic and multi-year-high metal prices eased concerns over the company’s ability to meet debt obligations, much of which are due to a spate of acquisitions since 2001.

Agarwal in the past tried to take the operating listed Indian arm private to have greater control over the cash flows but the plan was thwarted by minority shareholders. VRL’s only income is from the dividends that are upstreamed. Between March and April 2022, dividends totaling almost $2.4 billion were announced by VRL and, in July, Vedanta Ltd announced another tranche of close to $1 billion. Concerns over a global recession are likely to put more pressure on commodity prices and affect Vedanta’s ability to pass on larger dividends.