This project report provides an analysis and evaluation of the delisting of Essar steel Ltd and the performance of the company after the delisting. This also includes the analysis of the costs and benefits associated with delisting Essar steel Ltd . The methods of analysis that are incorporated in this project include trend analysis as well as ratios such as Debt, Current and Quick ratios for Essar Steel Ltd. The project also does the DuPont analysis for Essar Steel Ltd to assess the performance of the company after its delisting. Results of data analysed show that the company has been managing its operating costs efficiently but the financial costs have been below average.
The profit margin and return of assets has declined while the NOPAT has been increasing clearly suggests the need for a better management of financial costs. The reason quoted by Essar Steel Ltd to delist i.e. to increase the flexibility in operations is not reflected in the performance of the company. The considerably high solvency ratios of Essar Oil Ltd and its plan to expand its operations in the oil refinery sector are suggested as some of the reasons for its decision to remain listed.
The financial analysis conducted in this report is limited by the availability of financial information of Essar steel Ltd after the delisting process. The financial reports for the same were not accessible and hence the performance analysis is limited to the information that was readily available in the public domain.
Introduction
The permanent removal of securities of a listed company from a stock exchange so that investors can no longer trade shares of the stock on that exchange is termed as delisting. After the delisting, the securities of that company can no longer be traded on that stock exchange. But why is a company delisted? A company could either do a voluntary delisting on their part or the delisting can be forced on the company by the stock exchange. If it is a voluntary decision, the firm should pay its shareholders to return the shares held by them thereby removing the entire lot of shares from the exchange. After delisting from the bourses, a company can re-list its shares only after a period of 10 years.
There could be several reasons for a company to delist from the stock exchange. For example, the promoters of the company might want to increase their stake in the company. This implies that the promoters would like to have more freedom to make decisions which are confined because of the listings norms and regulations for listed companies. Sometimes a company might feel that the current underperformance of the stock is not justifiable and that the cost of funding is high compared to other instruments.
We have taken the case of The Essar group which decided to delist its steel and oil companies from both BSE and NSE during the year 2007.This project aims at analysing the rationale behind such a decision by Essar group when the market was considerably doing well. The project explains in detail the advantages and shortcomings that Essar Steel Ltd faced after making its decision to delist. The project also focuses on why Essar group went on with delisting Essar Steel Limited while reverting back its decision on delisting Essar oil Ltd. The guidelines that are to be followed when a company decides to delist itself from the stock exchange are described in detail through this project.
The large part of the data collected and used in this project are from the company annual reports and the company website. News articles that were published during the period in major financial dailies have also been referred to in several instances during the course of the project.
Research Background
Essar Steel Holdings Limited (ESHL), a Mauritius based subsidiary of Essar Global, Limited which is the largest shareholder and promoter of Essar Steel Limited, decided to delist Essar Steel Limited from The Bombay Stock Exchange and National Stock Exchange in the year 2007. ESHL and the promoter group held approximately 87% in Essar Steel Limited at that point in time. ESHL decided to seek consent of the equity shareholders of the Company for the proposed delisting of the shares in accordance with the SEBI Delisting of Securities Guidelines, 2003 and a notice regarding the intention of delisting was sent out to the shareholders of the Company.
ESHL intended to de-list the equity shares of the Company from the Bombay Stock Exchange and National Stock Exchange by following the voluntary delisting method. According to this method after obtaining the consent of the shareholders, a public announcement will have to be made in accordance with the SEBI (Delisting of Securities) Guidelines, 2003 for ascertaining the exit price to be paid to the shareholders of the Company.
Essar Steel Holdings Limited claimed that 'The delisting of equity shares of the Essar Steel Ltd would offer more flexibility in the operations and management of the company, greater efficiencies and at the same time provide an exit opportunity for its shareholders.'
Essar Steel Limited
Essar Steel is a global steel company with presence in India, USA, Middle East and Canada. Essar Steel is fully integrated from mining to retail and has strong capability with a global retail capacity of over 3 MTPA. The product portfolio of Essar steel limited includes pipes, cold rolling, plates and pre-coated segments.
In the 1990s the Essar group entered into steel making with its Hazira plant in Gujarat and a pellet plant in Visakhapatnam. During the same decade the Essar Group expanded its scope into other businesses gas exploration, oil refinery and other industries.
As part of its business strategy, the Company diversified its unrelated business to a series of different companies, which still remain in the Group. Oil and energy operations were transferred to Essar Oil Limited in May 1992 while the construction business was transferred to Essar Projects Limited in March 1993.
Essar Oil Limited
Essar Oil is a listed company in India and is engaged in the exploration and production of oil and natural gas, refining of crude oil, and marketing of petroleum products. Essar oil invested in expansion activities after deciding not the delist from Indian stock exchanges. As a part of its expansion plans in July 2009, Essar acquired a 50% stake in Kenya Petroleum Refineries Ltd. It operates a major refinery in Gujarat, India, which made it the second largest non-state refiner in India in 2009.
Delisting
Delisting is the process of removing a listed company from stock exchange.
Types of delisting:
Broadly, delisting of securities may be of 2 types:
Voluntary delisting :
Delisting of securities voluntarily by a promoter or an acquirer or any other person other than the stock exchange(s), i.e., a listed company seeks delisting of securities on its own motion.
Compulsory delisting :
A listed Company is compelled by the Stock Exchange to delist its securities
'Promoter' means a promoter as defined in clause (h) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers) Regulation, 1997 and includes a person who is desirous of Exchange Board Of India (Delisting Of Securities) Guidelines - 2003.
A public listed company may decide to delist for various reasons. Essar Steel decide to delist through Voluntary delisting process for better flexibility of operations and management
Following are the conditions for voluntarily delisting a company from Stock Exchange:
The company should be listed at least 3 years in Stock Exchange
The investors should be given an exit opportunity and an exit price will be determined based on "reverse book building process"
Essar Steel satisfied both the conditions as they were listed in BSE for more than 3 years and they followed reverse book building process to identify the "Exit Price"
Benefits of Delisting:
The company need not disclose its financial results to regulatory bodies, thus escaping the public scrutiny
The company can shed off its costs of complying to the SEBI regulations
The company may not meet the minority shareholder requirements, thus clearing its way for inside operations like capital raise/reduction , partitioning
Costs of Delisting:
The main disadvantage is that the company could no longer raise capital through stocks market.
The company exiting the markets have to buy back shares from shareholders which will add to the company's debt , if they didn't have cash reserves
Reverse Book Building Process:
The process through which the exit/discovered price of the shares of a company is determined, is called reverse book building. This happens whenever a company exits from the stock exchanges through delisting process. Reverse book building enables stockholders to tender their shares at a price of their choice and the acquirer the freedom to accept or reject the offer.
Following are some the features of Reverse book building process:
1) Reverse book building actually involves generating offers/prices from the shareholders who have no indication of the acquirer's intention on the price that the acquirer is willing to pay for the strategic value of the company.
2) Reverse book building helps to arrive at the exit price for delisting of shares. The exit price will be determined on the basis of the average of weekly highs and lows of either 26 weeks or 52 weeks. This will be the minimum price offered.
3) Reverse book building process is expected to provide a transparent, fair, and reasonable mechanism for pricing of shares and ensure investor participation in the whole process of delisting.
4) Reverse book building process provides a transparent, fair, and reasonable mechanism for pricing of shares and ensure investor participation in the whole process of de-listing.
Mechanism:
The acquirer determines the floor price of the offer based on the average prices for 26 weeks since the date of public announcement. Shareholders are then allowed to tender their shares at or above the floor price. Once the reverse book building process is completed the final price will be determined as the price at which the maximum shares are tendered. While this provides the shareholder an opportunity to determine the price, the acquirer has the right to accept or reject the price so discovered. In case, the acquirer accepts the price, all shareholders who bid at to below the discovered price, will receive the discovered price for their holdings.
Criticisms:
Despite many advantages claimed by the reverse book building process, it is criticized on the following grounds:
1) Manipulations: The process of reverse book building is prone to manipulation, as it would operate on a restricted audience, as against an IPO, which is open to the general public. The possibility of getting a fair price for shareholders in the reverse book building process is limited, as this process is subject to manipulation in the hands of more experienced and savvy shareholders.
2) Low participation: Moreover, the participation of the small shareholders (or the public) will be extremely low as their understanding of the process is imperfect.
3) Price Indication: Any open offer de-listing should indicate the price that the buyer is willing to pay.
4) No fair price: Under the rising market conditions, the floor exit price which is based on the 26 week average may not be truly reflective of the current market price. Hence, such a price will not serve as a useful benchmark for the investor.
5) Non-acceptance: Although the shareholders command the flexibility of tendering their shares at any price, they also run the risk of their shares not getting accepted if the acquirer finds the price unattractive.
6) False price: There is a bigger risk of speculators spreading false information in the market and thereby increasing the share price to unrealistic levels and selling the stock back
Essar Steel delisting process:
On 25-Jan-2007, Essar steel informed the exchange that Essar Steel Holdings Limited (ESHL) a major promoter shareholder of Essar Steel Limited has decided to delist the shares of Essar Steel from NSE and BSE. On that date ESHL was holding 87.08% shares of Essar Steel. On January 29, 2007,the Board of Directors has appointed Shri T N V Visweswara Rao, Chartered Accountant has been appointed as the Scrutinizer for conducting the Postal Ballot for the resolution of voluntarily delisting the company in a transparent and fair manner. On March 21, 2007 it was announced that the resolution was approved by required majority shareholders.
On March 26, 2007, Essar Global Limited proposed to acquire a 100% equity share which represents 7.19% of the total equity share capital of Essar Steel.
On September 11, 2007, the acquirer, Essar Steel Holding Limited proposed to acquire all the outstanding shares not held by the Promoter's i.e. 14.7 crore shares. The floor price is calculated as Rs.38 for the reverse book building process as per SEBI guidelines.
On October 5, 2007, Edelweiss Capital Limited, Managers to the delisting offer informed the exchange that Rs 48 has been identified as the Discovered Price for each equity share of Essar Steel Limited. This price was accepted by the Acquirer and offered the Discovered Price as the price of acquiring the shares. As a result, all the shareholders who bid Rs 48 or below will be paid the Exit Price of Rs.48 per equity share.
On November 16, 2007, ESL proposed to pass special resolution for premature redemption of 0.01% Cumulative Redeemable Preference Shares of Rs. 10/- each at a premium of Rs. 2.50 per share (viz. Rs. 12.50 per share).
On 23 November 2007, exchange was informed that trading in ESL equity shares will be suspended with effect from December 7, 2007.
Performance Analysis of ESSAR Steel before and after delisting:
When Essar steel decided to delist, they specified "flexibility in operation and management of the company" as the reason. Hence it is important to analyse the company's performance after delisting to validate the reason given by the officials. Due to the unavailability of financial reports of Essar steel in the public domain, the performance analysis is restricted to the financial year 2008-2009.
DuPont Analysis:
Ratios/Years
2006
2007
2008
2009
Profit Margin
PAT
8.57538%
5.32672%
3.98964%
1.58449%
NOPAT
24.6387%
15.6272%
13.0063%
15.6347%
Return on Assets
PAT
4.98955%
3.8206%
3.8099%
1.5907%
NOPAT
14.336%
11.2088%
12.4205%
15.6962%
Asset Turnover
0.58185
0.71726
0.95497
1.00394
Return on Equity
18.4207%
10.2711%
9.42097%
3.9375%
Table 2.1: Profitability Ratios
From the table 2.1 it can be inferred that the profit margin calculated using PAT is steadily decreasing over the years. Hence the company's ability to make profits out of the sales is decreasing. But when profit margin is calculated using NOPAT (Net Operating Profit After Tax), it has remained almost in a constant level over the 3 years. Also profit margin using NOPAT is far higher compared to profit margin using PAT. This indicates that the profit made out of operating activities is steady but the other investment activities made by the company are affecting its profit negatively. Hence its performance based on operational activities is satisfactory but it has to keep a check on its other investment activities.
Return on assets for Essar steel is constantly declining. This indicates the deterioration of overall performance of the company. This also provides insight about the management's ability to handle assets in producing profits, which has gone down over the years. But once again when NOPAT is calculated, Return on Assets steadily increases. This signifies that Essar steel manages to utilize its assets effectively to run its operation, hence increasing the profits out of its operational activities but it is not effectively managing other investment activities. Both NOPAT profit margin and return on assets indicates that Essar steel's performance is improving in terms of its operation but declining overall due to the negative impact of other investment activities.
The asset turnover ratio of Essar steel has increased over the years, indicating the ability to optimise the assets it posses, to increase the sales. Hence Essar steel is performing efficiently to maximize it sales with the assets it posses. Return on equity has sharply declined over the years. It can be attributed the sharp decline of the profit margin over the years.
Liquidity Ratios:
Ratios/Years
2006
2007
2008
2009
Current Ratio
2.49667
1.26043
1.16522
1.68303
Quick Ratio
0.95651
0.59293
0.541
0.89022
Debt Turnover Ratio
12.2251
15.0769
23.6833
30.2794
Table 2.2 Liquidity Ratios
Current ratio for Essar steel has increased compared to the last 2 years. This indicates the company's ability to handle adverse risks has increased over the years. Current ratio is presently at 1.68 which means for every one rupee of short term requirement of money, 1.68 rupee can be raised in the short term. The company's position is better compared to previous years in handling risks without affecting the normal operations.
Since inventories are difficult to convert to cash over short term, quick ratio is calculated. Quick ratio for Essar steel stands at 0.89 and has been constantly increasing over the years. This signifies the better position of Essar steel in handling short term obligations without interrupting the operational activities.
Debt turnover ratio for Essar steel is on constant rise signifying the company's ability in managing receivables. This increase attributes to the faster conversion of debtors to cash and also the quality of the company's portfolio of debtors. The company has decreased the average debt collection period, which indicates the improvement in collecting debtors. Current ratio, quick ratio and debtor turnover ratio all indicates the better position of the company in meeting its short term obligations at the present scenario.
Solvency Ratios:
Debt to equity ratio of Essar steel has fluctuated over times and it is relatively higher. It indicates that Essar steel has utilized debts at a higher level compared to equity. The higher value indicates the risk of using debts over equity to finance its assets. Liability to equity ratio indicates the total liabilities a company has obtained in comparison with equity. Liabilities to equity ratio have steeply increased from 2008 to 2009 indicating the excessive collection of borrowings during the financial year 2008-2009. It is also to be noted the difference between debt to equity and liabilities to equity are minimum.
Ratios/Years
2006
2007
2008
2009
Debt to Equity Ratio
1.98579
1.55401
1.3207
1.53097
Liability to Equity Ratio
2.37063
2.33487
1.42606
2.12461
Overall Performance:
From the NOPAT profit margin, NOPAT return on assets, Assets turnover ratio, current ratio, quick ratio and debt turnover ratio mentioned above, it can be inferred that Essar steel's performance concentrating on operational activities has increased over the years. But considering the sharp decline in profit margin, it can be inferred that the overall performance of the company is declining. This decline is mainly from the negative contribution of other investment activities. After delisting their investments on various other sources has contributed to the decline in the performance. Hence 'the flexibility in operation and management of the company', as they claim, has led to the decline in overall performance due to the investment lapse. This performance analysis is restricted to the immediate year after delisting financial year 2008-2009. Since the company has delisted, the financial report of further years is not available in public domain.
Essar Oil Delisting :
Essar energy global limited, the promoters of Essar oil initially announced their decision in Jan, 2007 to delist Essar oil along with Essar steel. Initial move was aimed at consolidating the promoter's holdings into Prime holdings, a closely held Mauritius based investment arm .Essar group planned to combine their holding companies and list them in overseas stock exchanges to expand their business globally. The group then sought SEBI's permission to delist Essar Oil without having to make an open offer. The promoters had a stake of 88 % in Essar oil, while the delisting requirement for the promoters is to hold a minimum of 90 % .Later the company reversed its decision of delisting and announced new plan to increase its operational capacity. In November 2007, they confirmed that it has given up its plan to de-list from the stock exchange.
Initial Reasons stated for delisting:
Initial decision of delisting was based on the idea of regrouping their business and focus on global market. Also, during the period, the market valuation of Essar oil was much lower than other competitors. To be listed, the company had to comply with SEBI regulations. Essar group with very high shareholding with their promoters, found it difficult to comply with. Also the group estimated high growth prospects in new markets. They stated that being a single holding company would help immensely in bringing credibility in the market. It would be a major value addition, when it had decided to take up debt from the global market.
The rationale behind their reason to give up their initial plans was that, Essar Oil had many advantages of being listed in India when compared to Essar steel. The growing demand for oil and increase in production capacity of competitor, Reliance forced Essar oil to increase their production in India. The company had massive plans of expansion of their then newly acquired Vadinar plant in Gujarat. In November they unveiled their enormous expansion plan of trebling its refinery capacity from 10.5 MMTPA to 34 MMTPA. The company will require a capital of $6 billion to fund its expansion plans, which will hold the company in good stead to encash future opportunities. Also the company had high existing debt and speculations of delisting from stock exchange lead to huge volume of share trade and significant increase in their stock price.
Looking at the financial reports of Essar oil, the company had high debts piled up in its balance sheet. The debt - equity ratio for the year 2006 was 2.40 and it acquired more debt to finance its capacity augmentation, which lead to D/E of 2.86 in 2007. For buy-back of shares the debt - equity should not exceed 2:1.
Ratio/Year
2006
2007
2008
2009
2010
Debt equity ratio
2.40707
2.86179
2.75918
2.43682
1.98808
Liabilities equity ratio
2.77702
4.42066
4.8969
4.12003
3.9434
To accrue required capital funds for capacity expansion and other corporate purposes, including the existing debt of the company, they issued global depository shares (GDS) to the promoters / promoter group on a preferential basis, up to an amount of $2 billion at an effective price of Rs. 200 per share for the underlying equity shares, which will add to its already huge debt. This is one main reason that Essar Oil decided not to delist as it could not raise capital from public in the future.
Conclusion
Essar Group declared Essar Steel's delisting on the context of improving its flexibility and operating efficiencies. The declining trend in Profit Margin (PAT ratio) and Return On Assets (RoA) despite increasing NOPAT clearly suggests that the company has failed to manage its finance costs though it is able to manage its operating costs efficiently. Thus it can be concluded that the delisting process was not so successful in helping Essar Steel to accomplish its targets. However the company may relist itself either on foreign stock exchanges or on Indian Bourses in near future considering the fact that restructuring will make fund raising easier both in India and abroad, thus helping in global expansion.
