Why Vedanta wants to sell Electrosteel and exit the steel business

Billionaire Anil Agarwal-promoted Vedanta Industries is looking to sell its subsidiary Electrosteel Steels and exit the steel business, news reports say. 

The development comes four years after Vedanta acquired the company, but now wants to exit as it looks to focus on its core mining and industrials businesses and also because it is looking to pare $11.7 billion in debt on its balance sheet.

So, what has Vedanta done about it so far?

According to a news report by The Economic Times newspaper, Vedanta 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. Top executives like ArcelorMittal CEO Aditya Mittal have also visited the site along with Vedanta Group officials in recent weeks. 

What is the history of Vedanta’s takeover of Electrosteel?

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. ESL became the second steel company to see 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 had the potential to generate significant efficiencies.

Electrosteel Steels was a subsidiary of Electrosteel Castings. Upon taking over, Vedanta delisted the company.

How is the Vedanta Group broadly structured?

Vedanta Limited (VDL), the Indian operating company which houses the diversified portfolio of oil and gas, zinc, lead, silver, aluminium, 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, owns 100% of VRL. The company portfolio includes pig iron, TMT bars, billets, ductile iron pipes and wire rods.

How big is Electrosteel Steels?

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.

How much does Vedanta want to make in the deal?

Vedanta’s asking price has more than doubled and the company is looking at a Rs 10,500-12,000 crore valuation, the ET report said. 

But what is worrying Vedanta enough for it to consider selling the company?

On October 31, Moody’s Investors Service downgraded the corporate family rating 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.

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.