Pitch Book:

Acquire Electrosteel Steels

Limited

NOVEMBER 15

Equit I
Authored by: Pranjal Garg

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Business Description
Electrosteel Steels ltd.
Located in Jharkhand, the plant manufactures Pig Iron, Billets, TMT Bars, Wire
Rods and Ductile Iron Pipes.
The maximum capacity of the plant is 2 million tons per annum.
ESL is customer of iron ore.

Performance
EBITDA – Rs.60 per ton (Tata Steels EBITDA – Rs.70 to Rs.80 per ton)
Registering losses for more than 4 years.
Though the revenues are rising every year, but the corresponding expenses are
rising at a much faster rate.
Major reasons for losses :
 High interest amounts paid to financial creditors.
 High Depreciation charged due to low maintenance.
 Low profitability.
Financial Standings :
 Financial Creditors – Rs.13395 crores
 Operating Creditors – Rs.782 crores
 Value of Plant capitalized in 2016 – Rs.7500 crores (replacement value of
such plant in the region – Rs.7800 crores)

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Industry Overview
Robust Demand for the steel in the Indian Economy and foreign markets
Policy Support by the government to the Steel Sector
Market Size 2015: 91.46 million tons. Expected Market Size 2025: 300 million
tons

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Why acquire ESL?
Vedanta limited is already in process of setting up a 1 million ton plant to make
pig iron and ductile pipes; And ESL plans to improve the capacity of its plant
from 2 million ton to 2.5 million ton. So acquiring ESL will not only allow
Vedanta to enter this industry directly, but also ESL has iron ore linkages to
supply raw material to the project so Vedanta could get access to these mining
reserves as well.

Advantages to acquire ESL?

 Acquiring ESL means Forward Integration for Vedanta. It will reduce the
operating costs for the manufacturing process.
 Vedanta has iron ore mines around the ESL plant, thus reducing the overall
costs.
 Vedanta can up the capacity of plant and improve the EBITDA.
 ESL is going bankrupt so negotiations will be easier and Vedanta can drew
advantage.

Financial advantages for Vedanta to acquire ESL–

 The current production volume is 40% of capacity, majorly due to
shortage of liquidity. Infusion of cash in ESL will improve the utilization.
Cost Control.
 If ESL gets approval of the captive iron ore block in Jharkhand, the
production costs will fall further.
 ESL assets (the 2 million ton plant) are fairly new and capitalized in FY
2016 at the cost of Rs.7500 crore. The replacement value of such plant in
the region gives the valuation of ESL of about Rs.7800 crores.
o Negotiations can bring the deal down to as low as Rs.5500 crores.

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 o Nearly 1800 crores for the 85-95% of equity in ESL and rest for Inter
Corporate loans. This will also fetch management rights to
Vedanta.
o The financial creditors will be paid 40% in cash by the amount
infused (Rs.5500 crores) by Vedanta and rest of them will get
shares in exchange of their debts.
o This will decrease the annual expense of interest and allow ESL to
make profits.
 ESL current EBITDA is 1200-1400 crores. The return on investment for
Vedanta is 22-25%, which is larger than Vedanta’s own returns of 16%.
 The investment in ESL will be around 3.8% of total balance sheet size of
Vedanta. The investment is small in size but significantly improve the
return ratios.
 If cost control, higher volumes and tight management policy is
implemented the EBITDA of ESL can be brought up to as much as
Rs.120 per ton (Double of the current EBITDA)
 Vedanta’s consolidated net debt to equity of 17% gives it flexibility to
find this bid without stretching itself.

Summary –
At the valuation of Rs.5500 crores the deal is quite smaller than the original cost of
around Rs.7800 crores. ESL’s current EBITDA of 22% is higher than that of Vedanta’s
16% and the former has the potential to improve its financial performance in the
future. Increasing the capacity to 4 million ton will further reduce the operating
costs.
Thus, VEDANTA should go for this deal.