Essar seen in talks with Germany’s BASF for $ 2 billion petrochemical JV

Mumbai: Steel-to-BPO conglomerate Essar is in talks with Germany's BASF, the largest chemicals player in the world, for a petrochemicals joint venture, according to people directly involved in the discussions. The move revives a diversification plan which had been put on hold for long, both because of the global factors and the company's high debt burden.

Essar, led by billionaire brothers Shashi and Ravi Ruia, has long nurtured a desire to be an integrated oil and gas major and had conceptualized an integrated petrochemicals complex along with its refinery expansion in Vadinar, Gujarat. With Essar Oil, the country's second largest private refiner, trudging back to profitability in FY'14, the plans are back on track.

Moreover, the petrochemicals industry, experts say, is poised for a strong rebound from fiscal 2016. Already key Indian players, notably Reliance, is working towards completing a mega $8 billion expansion to ramp up overall petrochemicals capacity by 66% and offer a much bigger product basket.

Essar's refinery currently has a 20 million tonne per annum (MMTA) capacity and is capable of refining a diverse range of crude.

The total project cost is expected to be $2 billion, inclusive of debt and equity.

Interestingly, according to the people cited earlier, cash strapped Essar is not willing to pump in funds by way of equity upfront and wants BASF to bankroll the entire venture, at least for the initial years. However, it is keen to infuse its share of equity over a 3-5 year period.

"It is still not clear if it will be an equal 50:50 JV or BASF will retain a 70% share. They would want majority (stake) since they are likely to finance the project almost entirely to start with. These structuring and funding related discussions are still ongoing," said one of the sources mentioned above. All the people contacted for this story spoke on condition of anonymity as the talks are still in the private domain.

Both sides however are still to sign a definitive agreement and a transaction may still be some time away, according to these people.

SBI Caps, the investment banking arm of the country's largest lender, is working as an advisor and is currently preparing a detailed project appraisal and financial feasibility report.Spokespersons of both Essar Oil and BASF India told ET they do not comment on market speculations and rumours.

Essar is one of the most indebted business groups in India Inc. with over $14 billion of net debt at the end of the last financial year as per a Credit Suisse report - a fallout of its rapid expansion in steel, power and oil refining in the past decade. In FY'14, the net debt of Essar Oil alone stood at Rs 17,410 crore with a very high net debt to equity ratio of 7.1. Essar also has a liability of Rs 6149 crore of sales tax on account of a Supreme Court ruling that it was not entitled to a tax holiday on its refinery. Consequently the company is not keen to commit to new capex just yet.

Spokespersons of both Essar Oil and BASF India told ET they do not comment on market speculations and rumours.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.