Times have been tough for one of India’s largest conglomerates, Essar Group. Various banks recently attempted to remove its debt from their balance sheet, with the oil and steel giant also in the process of consolidating its assets. Aashish Pitale, group treasurer, discusses the challenges faced.
GTR: For the past few years, energy and steel prices have been extremely low. Crude has picked up slightly, but what is your outlook for these markets?
Pitale: Actually crude is about 20 to 30% higher than the low from last year, but there is not enough confidence in the market yet. I think it’s a question of where growth is headed. You’ve seen that the US has again gone soft on the rate hike. The demand is going to come off from the US, and that’s going to be bad news for the oil markets. With spring and summer setting in, heating oil demand is going to go down.
GTR: There has been much said and written about the impact of cheap Chinese steel being dumped on the Indian market. Is this affecting your steel business?
Pitale: It was at one time but no longer now that there are import tariffs on steel. The price advantage the Chinese had for dumping has now gone. It has improved the situation. We are doing much better volume than we were a few months ago. Capacity at the plants has gone up and we’re producing and selling more steel than we were earlier.
GTR: The big news in the steel market has been Tata offloading its UK business. Is that indicative of the wider state of the market?
Pitale: That’s the overall situation, nobody is looking at expanding. Most of the assets are mature and nobody is looking to set up new facilities. The intent is to improve the capacity utilisation for existing plants. Most of our investment was done years ago, the build-up of assets happened seven or eight years ago. The assets we own are mature. And we’re looking to capitalise on those, to make funds from them. It will be a different field of investment when it does happen, but as of now we’re looking to consolidate and maybe find strategic partners where it is beneficial, for our own assets.
GTR: You’re trying to to offload your steel assets [since this interview took place, it has been widely reported that this was a demand made on Essar Group by its creditors amid banks attempting to de-risk their balance sheets]? How difficult is this in the current climate?
Pitale: Yes, that is happening. We’re looking to find strategic buyers who will take business to the next level. It is not that difficult, depending on the size of the plant. We have one of the largest steel manufacturing capacities in India, so that’s obviously an attraction for anybody who wants to get into the Indian market. It’s the same with oil: apart from Reliance, our oil refining capacity is the highest. So anyone looking to get into the Indian market or exporting, a partner like Essar is the first target they’ll look at.
GTR: Where is the main interest coming from?
Pitale: That’s unfortunately not public information yet, but what I can tell you is that for the oil business we have a fair amount of international interest. For the steel market there is domestic interest.
GTR: Could you explain how your trade finance team is structured and how you go about deciding where and how much to borrow?
Pitale: Our trade finance team is part of the group treasury. What the team does is keep in regular touch with 40 or 50 banks all across the globe. So from centres like Singapore and Hong Kong in Asia, to Dubai in the Middle East, to London, New York – everywhere. At different points in time there are different geographies which may be able to offer a better rate. So around 15 months ago the best rates you were getting were in New York. Then as quantitative easing came off you were getting better rates in the Middle East than anywhere else. So the dynamic is changing depending on the local liquidity situation in these centres, and that’s how we target our borrowing from those specific banks. By and large, we have a good sense of the amount required. On average, I’ve been borrowing about US$800mn to US$900mn a month, for my short-term needs. Short-term is anywhere between one and three months. That’s a pretty large requirement. For that kind of volume, I’m able to command the best rates across the world.
GTR: Has pricing normalised, or is it still lower than expected? Do you organise all the borrowing centrally in Mumbai?
Pitale: Some normalisation has taken place, but not so much as yet. To give you a sense, we were borrowing at Libor + 75 basis points (bps) three years ago. That dipped to about Libor + 29 bps late last year. Now we’re back to Libor + 35 bps, so it is higher than the lows of last year, but it’s still very low. I expect that as growth improves there will be an increase in the borrowing cost, but right now it’s slower than anticipated. Yes, this is a central treasury so the trade finance requirements are all handled by the same team here in Mumbai. Because of the interaction with banks in New York and at times Tokyo, we have early days and late evenings – but that comes with being across the globe.
GTR: You have 40 to 50 banking relationships: are these fluid? Are you always on the look out for new banks? How has bank retrenchment from Asia affected your borrowing base?
Pitale: Many of these banks are smaller banks as well, but the bulk of the business – maybe 80% – goes to the more established banks which have been with the group for a long time. We’ve not really seen much difference [since retrenchment], because these banks are finding it difficult in any case to match the rate we’re getting from banks in other jurisdictions. So if I’m borrowing from, let’s say HSBC in London or New York, then HSBC Mumbai will not be competing with that facility at all. I’m looking at borrowing from international branches, not local branches.
GTR: Everyone that we spoke to from local banks in Mumbai this year said pricing was too low, but international bankers said pricing was too low! Does this show the differing approaches to lending between the domestic and international markets?
Pitale: That’s true, in fact what’s happening over the last few years if you see the regulations for Basel III or International Financial Reporting Standards [IFRS], is that it’s becoming more and more expensive for banks to do business in non-local jurisdictions. The capital cost is becoming too high for a bank that is domiciled in the US or in Europe to do business in countries like India or Singapore – any non-local jurisdiction.
GTR: The common view is that emerging markets will be hit harder by these regulations than developed markets. Is this a view you share?
Pitale: I think we need to wait and see. I am not sure that emerging markets will be hit hardest. Those emerging markets that don’t have a strong local banking network will be hit hard, but those that do have nothing to worry about. It’s all about whether your domestic banking system can provide all the services required by the corporate.It’s not like you can paint all markets with the same brush. Those who are wholly dependent on international banks will be the ones who suffer most, but for markets like India where 85% to 90% of the business is taken by the local banks it’s not going to be so much of a concern.
GTR: Indian exports are sluggish and there’s a bit of a mixed outlook for the general trade sector. What is your own view?
Pitale: I think we’re in a situation where the current government is going to be a bit volatile. We’ve seen exports come down, and over the past several months, imports have dropped mainly because of oil prices. But now we’re in a situation where oil prices are beginning to rise, they are stabilising from the lowest levels seen last year. At the same time, exports are down and that is going to put some pressure on the current account. It remains to be seen how that plays out and what kind of impact it has on the currency. So far, capital flows have more than countered the drop in exports and helped to finance the current account deficit. How far that will take us brings another question mark. We’ve seen in the last month or so that the rupee which had dropped to 68 to the dollar is back to 66 [it currently sits at 67 Indian rupees to US$1]. So there has been a significant appreciation on the rupee over the last month or so. But whether it can sustain its value is a bit doubtful.