Cash cows sold, cash guzzlers remain: Rocky ride ahead for Chandra's Essel

Subhash Chandra
Essel Group, led by media mogul Subhash Chandra, is in for a rocky ride after losing control over two of its biggest cash cows — Zee Entertainment and Essel Propack. Both companies accounted for the bulk of the group companies combined post-tax profits last financial year and were debt-free on a net basis, unlike the rest, shows an analysis of its financials.

Five years ago, Subhash Chandra has passed on the control of the specialty packaging major -Essel Propack to his younger brother Ashok Goel as part of the family arrangement. A profitable and significant cash generator, Essel Propack was acquired by American private equity major Blackstone. Blacksote acquired majority stake in the company earlier this year for around Rs 2,200 crore.

Analysts say the group is now largely left with cash-guzzlers like Dish TV, Zee Media, Siti Networks, Shirpur Gold, and Essel Infraprojects. “The group is left with capital-intensive and low-earnings businesses in sectors such as satellite broadcasting, news television, cable television, and infrastructure. This greatly reduces promoter’s financial flexibility in the absence of a large free cash flow-generating businesses, such as Zee Enterprises,” says an analyst.

In 2018-19 (FY19), Zee Entertainment and Essel Propack together accounted for nearly 70 per cent of the combined operating profit (earnings before interest, tax, depreciation, and amortisation or Ebitda) of Essel Group’s listed companies and nearly 85 per cent of the group’s post-tax profits. Zee Entertainment and Essel Propack together reported a net profit of around Rs 1,600 crore against the group’s combined net profit of Rs 1,860 crore, adjusted for exceptional gains and losses, last financial year.

The two companies had little debt on their books and were debt-free when adjusted for cash and equivalent on their books at the end of FY19. The rest of the group’s listed firms, however, had a combined net debt of around Rs 5,000 crore at the end of March 2019, against the net worth of Rs 7,100 crore.

Zee Entertainment was the most profitable and single-largest company in the group by revenues and together with Essel Propack accounted for 40 per cent of the combined revenue of the group’s listed companies.

This resulted in a worsening of the group’s financial ratio, even excluding the numbers for debt-heavy and unlisted Essel Infraprojects. The company last reported its audited finances for 2017-18 (FY18). Excluding Zee Entertainment, the group's combined net debt to equity has worsened to 0.71 from 0.1x earlier.

Essel Infra had a total outstanding debt of around Rs 17,000 crore on a consolidated basis and net debt-to-equity of 3.5x at the end of March 2018. This makes it one of the most indebted infrastructure companies in the country. The company reported a net loss of Rs 523 crore during FY18 over revenues of around Rs 3,500 crore. The infrastructure company has not filed its latest numbers with the Ministry of Corporate Affairs or rating agencies.

On Thursday, the rating of Essel Infraprojects was downgraded to ‘D’ category by Brickwork Ratings by taking into account the delay in servicing of bank loans as reported to Brickwork Ratings by the bankers to the company, the rating firm said in a statement.

Apart from debt on the books of individual companies, the promoter entities had taken an additional debt. Part of this debt was paid off by the sale of Zee Entertainment’s residual stake on November 21 for Rs 4,400 crore by the promoters. Subhash Chandra resigned as chairman of Zee Entertainment soon after the stake sale but remains a director on the board. Mr Chandra elder son Punit Goenka remains company’s MD & CEO.

A Essel group spokesperson did not respond to an email query. 

Sources however say that their long-term plan is to deleverage the group by divesting their non-media assets. “They already sold off some assets of Essel Infraprojects and are in talks with potential buyers to divest additional solar and highway assets. This is likely to greatly reduce the debt at the company level,” said a source close to the group. 

According to him, the long-term plan is to convert Essel into a media-focused business group. The group had sold Essel Propack to American private equity major Blackstone for around Rs 2,200 crore in April this year. In July, it had sold 11 per cent of its stake in the 

entertainment company to Invesco Oppenheimer for Rs 4,224 crore. All these divestments are part of the group plan to prepay loan taken by the promoter entities to fund the expansion of their infrastructure arm — Essel Infraprojects.

Dish TV is now the largest firm in Essel Group, with revenues at Rs 6,200 crore as of last financial year; its operating profit was Rs 533 crore and net loss was Rs 1,145 crore in FY19. The company is facing headwinds. Its revenues were down 44 per cent a year-on-year basis during the first half of 2019-20 and it reported a net loss of Rs 123 crore.

The group has announced plans to sell Dish TV to a consortium of Bharti Airtel and Warburg Pincus, but there has been no progress on the deal. Of its stressed infrastructure companies, Essel Group agreed to sell its renewable power business to Adani Group in August at an enterprise valuation ofRs 1,300 crore.

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