It's not for any lack of focus in the group. On the contrary, the group has a clear strategic focus in looking at opportunities in the development of core sector and infrastructure businesses in India and abroad. At present, the group is actively involved in five principal businesses - steel, shipping, oil & gas, power and telecommunications.

One clue to the debacle is provided by the dismal returns from these businesses. For the last fiscal, group income was Rs 4,000 crore on an asset base of Rs 15,000 crore. EBITDA earnings were Rs 1,200 crore which gives an 8 per cent EBITDA returns on investments. At the net level (excluding the earnings from telecom and finance business) there is a loss of Rs 413 crore against a profit of around Rs 100 crore in the previous year.

Thereare any number of excuses for the group's poor showing. The ills of the group are blamed on the commodity cycle, wrong timing of the completion of the project, dumping, high leverage, trying to grow too fast, bad project planning resulting in cost overrun, lower incremental returns on investments, wrong choice of financial instruments et al.

Lets look at these parameters one by one:

The common excuse floating around is that externalities caused the damage. These external factors include effects of the southeast Asian crises that resulted in a fall in commodity prices across the world. The sudden contraction in demand resulted in frantic selling by most players and product prices dipped to their historical lows.

Essar officials state that when they had conceived the Essar Steel project, they had assumed domestic prices would rise to $420 per tonne from the prevailing price of $340 per tonne. The effects of the Asian crisis brought down the price to as low as $180 per tonne. The dumping of steel intoIndia also played a role. This impacted the profitability of the company. Even today if the prices rise to $420 per tonne, the top line would rise by a minimum of Rs 1,100 crore, while the bottomline would show an earnings level of Rs 628 crore, that is, a 11 per cent return of assets. But then history is full of examples of ten companies rushing into a sector which shows above normal return, resulting in forming additional capacities, which depresses the return for the entire industry. This is the case for the steel sector and to expect HRC prices at $420 per tonne in the near future is a fallacy.The same logic holds for the oil rig business of Essar Oil. The drop in oil prices resulted in fewer contracts for drilling and the income of Essar Oil fell drastically. Similarly, the shipping division could not make better profits as the Baltic Freight Index fell to a historic low.

While these external factors undoubtedly played a role, critics say that the management should have foreseen these problems, or atleast adapted the project to suit changed conditions. And if one were to take account of the steep depreciation in currencies vis-a-vis some of the steel producing countries, we would find that lower prices of imported steel in US dollars per tonne of steel was basically due to depreciation and not due to dumping.In fact, senior officials in the ministry of steel and mines say that for the first time the steel sector faced competition from foreign players and they did not know how to respond. Most of the companies are still living in the year of planned economy, wherein they sell a pre-determined quota of steel to buyers at some cost-plus factor. If an outsider comes and takes away their market share, they go to ministry clamouring for protection. A simple question that needs to be asked here is that what has the management done in the last five years to make steel popular? Demand has remained constant for the last three years and the reason it has remained so is because of the producers inability to developmarkets. This is in sharp contrast to rising demand of polymers, cements and other commodities. Many people have shifted their preference from steel to polymers or cement.

This says volumes about the efforts taken by competing industries to extend their industry boundaries. All the companies which have set up projects in the country have faced time and cost overruns. Even Reliance Industries, which many say has the best project managers, faced this problem. In most cases, at the end of the day, lenders never questioned the returns from the project and were eager to fund expansions. In Essar's case, however, this was not so.

The company always gave an impression that it was a follower and not an innovator in each of its project activities. In the refinery the proposals of enhancing capacity came after Reliance had got the go-ahead to increase its capacity from institutions.

So when in January 1999, the company had proposed capacity increase from 9 million tonnes to 24 million tonnes at a cost of Rs9,455 crore, the financial institutions refused to fund the increased capacity. The company will now set the refinery at a cost of Rs 6,000 crore with a capacity of 10.5 million tonnes.

Even the rating agency was not impressed. The delay in tie up of equity funds for the refinery saw Crisil downgrading the debenture issue thrice in less than 12 months. In addition, Crisil officials said that the company was not installing the coker unit and planned to use Murban Sweet crude for the refinery instead of original plan using 70:30 mixture by weight of light and heavy crude. This would result in different product profile and lower returns to stakeholders.

In the steel business, the company followed a piece meal approach in project implementation. Nothing wrong in the approach, but when you walk in to a lender again and again without your original assets generating adequate cash, there is little chance to get a favourable response. After the completion of the HR mill, the company had plans to install a blastfurnace and CR mill. The logic of backward and forward integration was the operational cost would come down. No one bought the argument and questioned the rise in capital cost for the company and today these project proposals are gathering dust.

Only investments which result in substantial technical upgradation can result in overall productivity improvement resulting in more meaningful returns to the company. None of the proposals put forward by Essar was in the latter category and hence was put on hold.

Financial instruments can make or break the company. If one were to pinpoint the problems in Essar, the only one that sounds credible is of inability to constantly look at instruments that would have taken care for eventualities such as default on FRN and have also kept other creditors more than eager to fund.

Essar group VP Finance Venkatesh counters this by saying that in the last year the company tried to raise $400 million from ECB borrowings. But the Pokhran blast de-rated Indian paper and theywere left with no choice but to postpone their borrowing program. Still this does not explain why has the balance sheet remained approximately static as far as equity funds were concerned. Simultaneously, duration of existing and new liabilities was on the deline. For any group which wants to remain in the infrastructure area, this is almost like a death knell.

Even today the long-term loans excluding that of the telecom business for the group is Rs 9,782 crore against the net worth of Rs 5,360 crore resulting in a debt: equity ratio of 1.82. This is high. But the duration of long term liabilities is even worse. The company shrugs off the question and says that liabilities were created at the time when there was not sufficient scope to borrow long-term funds. But how is it that Reliance Industries managed to raise paper of duration up to 100 years? At that time even Essar could have ventured to raise long-term finances. The equity capital of Essar Steel from 1995-96 has been hovering at around Rs 330 croreand the reserves in the range of Rs 1,975 crore to Rs 2,085 crore. Agreed, the primary markets were bad for equity issues, but there are ways of making the issue attractive by add ons such as warrants, call/put options on debt papers. An optimum capital structure could always be worked out.

Where Essar goes from here is anybody's guess, but there is no denying that there are important lessons to be learnt from the group's experience.