Mumbai: The $15 billion (Rs70,200 crore) Essar Group will consolidate its domestic steel operations into a single company to lower future borrowing costs, improve profit margins and avoid duplication of brands, a senior company official said.

Improved efficiency: An Essar steel plant at Hazira in Gujarat.

ESL plans to raise its capacity from 15 million tonnes (mt) to 24mt in next few years.

Essar Steel Hazira is building a 5.1mt hot-rolled coil or primary steel facility and Essar Steel Orissa is setting up a 12mt pellet plant to feed its primary steel plant while Hazira Plate and Hazira Pipe Mill are making value-added products for automobile and oil and gas industries. All four will be merged into ESL.

ESL’s three overseas firms— Essar Steel Algoma Inc., Essar Steel Minnesota USA and PT Essar Indonesia—are to be kept out of the merger plan.

ESL will be controlled by Essar Steel Holdings Ltd, a holding company for the group’s steel business, which in turn will be owned by Essar Global Ltd, owned by the Ruias, the promoters of Essar Group.

Following the merger of four firms into ESL, the company’s turnover will rise close to threefold, from Rs12,000 crore to Rs35,000 crore.

“A bigger balance sheet will allow us to raise money to grow, avoid transfer pricing and allow us to bid for large tenders with higher net worth," Mahadev Iyer, ESL’s chief financial officer, told Mint in an interview on Wednesday. Transfer pricing refers to the pricing of assets, services and funds transferred within group firms. If a transaction is between related parties with common shareholder or directors, the tax authorities have the right to open up the transaction to determine the correct value of the transaction and tax the entity accordingly.

ESL will seek shareholders’ approval for the merger plan on 2 January.

“The merger will also help us raise money abroad by listing on overseas bourses," Iyer said, though there was no immediate plan to list the firm.

Essar Global, owned by group chairman Shashi Ruia and his younger brother, vice-chairman Ravi Ruia, owns 93% of ESL after they bought back shares from other shareholders in 2007. Public shareholders who have not sold shares in the two buy-back offers own 7% stake in the company.

The primary driver to integrate units is to derisk the supply chain that will in turn improve operational efficiency and margins, said Anjani K. Agrawal, partner, advisory services at consultancy firm Ernst and Young Pvt. Ltd. Integrated companies are less exposed to vendors and customers than in the erstwhile stand-alone business, added Agrawal, who advises metal and mining companies.

Welspun Gujarat Stahl Rohren Ltd, or WGSRL, the largest exporter of steel pipes from India to multinational oil companies, is one such company that is becoming an integrated player in the steel pipe business.

“Our margins will double to $450 a tonne after we build the steel slab unit and plate mill," said Akhil Jindal, executive director at WGSRL.

The company, which has an order book of Rs8,000 crore with a delivery period of 18 months, is building a 2.2mt plate mill and 2mt steel slab mill in Anjar in Gujarat to become an integrated player.

This year, it bought Vikram Ispat Ltd, the sponge iron unit of Aditya Birla group, for Rs1,030 crore. Sponge iron is a raw material to make steel slabs.

Indian steel companies have been expanding capacities to meet increasing demand from the infrastructure sector. The steel ministry expects domestic capacity to double to 120mt by 2012.

The four companies were created to avoid financial pressure on ESL that has Rs5,500 crore debt, and Essar Steel Holdings has provided the equity funds to build the new plants, Iyer said. “We did not want a legacy of ESL on the new projects," he said.

ESL has also purchased Shree Precoated Steels Ltd, a 1.2mt downstream steel rolling and galvanizing plant for Rs900 crore.

ESL, which makes 3.6mt hot-rolled coil and 1mt of steel slabs in India, is expanding its capacity to 9.7mt. “Funds for all our current expansion have been tied up and 80% of the funds have been drawn from the lenders," Iyer said.

ESL has also received an export credit finance to buy machinery from SMS Demang AG for $400 million from KfW, a German government-owned development bank.