Interpreting Numbers & Trends The sales tax ruling for the debt-ridden oil refiner means that the company has to immediately pay . 6,300 crore to Gujarat
The current market valuation of Essar Oil does not provide any hint of the heavy loss the refiner had to bear recently on account of removal of sales tax deferment benefit. The loss lopped off a significant portion off its net worth, apart from creating an additional debt burden. The company recently completed a crucial expansion at its refinery, but will need urgent infusion of equity besides needing to lower its debt and interest burdens to stay in shape for the long term.
For a debt-ridden Essar Oil, the recent sales tax benefit denial has meant a repayment of . 6,300 crore to the Gujarat government. This made the company post nearly . 4,000 crore of net loss in the December ’11 quarter. Considering its net worth was just . 6,840 crore at the beginning of the quarter, a large chunk of it has now been wiped off.
That apart, repayments would necessitate further borrowings. At . 21,290 crore, its debt burden is way too high. The net impact will be a further weakening of its balance sheet and increased burden of interest costs.
The recent completion of its refinery expansion provides some hope. The company’s refining capacity is now 70% higher at 18 million tonnes annually, while its ability to process worst grades of crude oil — that are cheaper — has improved substantially. This should enable Essar Oil earn around $2-3 extra for every barrel of oil it processes. However, this is likely to be good enough only to make up for the loss of sales tax benefit.
The company is also taking steps to improve its balance sheet. Recently, its promoters agreed to convert $262 million of optionally convertible bonds into compulsorily convertible ones giving it the characteristics of convertible preference shares.
The company is also trying to move out of the corporate debt restructuring (CDR), which will offer them greater flexibility in raising funds. The company plans to borrow $400 million in foreign currency to reduce its interest burden, which was . 1,264 crore for the last 12 months. Similarly, a stake sale is on the cards to raise close to . 3,000 crore. Since the promoters hold nearly 90% of the equity in the company, selling shares to institutional investors or to the public will also help it conform to rules on a minimum public holding of 25%.
The Essar Oil stock has lost heavily in the last one year, but still commands premium valuations if one considers the December quarter losses. If that was to be ignored as extraordinary and one-time in nature, its price-to-bookvalue (P/BV) of 1.13 and a price-to-earnings multiple (P/E) of 11.8 are in line with its peers such as Reliance Industries, MRPL and Chennai Petroleum.
A lot will depend now on Essar Oil’s ability to repair its balance sheet. However, considering its existing debt burden, raising funds is not going to be easy. A dampened outlook over the global refining industry is not going to help either.
For a debt-ridden Essar Oil, the recent sales tax benefit denial has meant a repayment of . 6,300 crore to the Gujarat government. This made the company post nearly . 4,000 crore of net loss in the December ’11 quarter. Considering its net worth was just . 6,840 crore at the beginning of the quarter, a large chunk of it has now been wiped off.
That apart, repayments would necessitate further borrowings. At . 21,290 crore, its debt burden is way too high. The net impact will be a further weakening of its balance sheet and increased burden of interest costs.
The recent completion of its refinery expansion provides some hope. The company’s refining capacity is now 70% higher at 18 million tonnes annually, while its ability to process worst grades of crude oil — that are cheaper — has improved substantially. This should enable Essar Oil earn around $2-3 extra for every barrel of oil it processes. However, this is likely to be good enough only to make up for the loss of sales tax benefit.
The company is also taking steps to improve its balance sheet. Recently, its promoters agreed to convert $262 million of optionally convertible bonds into compulsorily convertible ones giving it the characteristics of convertible preference shares.
The company is also trying to move out of the corporate debt restructuring (CDR), which will offer them greater flexibility in raising funds. The company plans to borrow $400 million in foreign currency to reduce its interest burden, which was . 1,264 crore for the last 12 months. Similarly, a stake sale is on the cards to raise close to . 3,000 crore. Since the promoters hold nearly 90% of the equity in the company, selling shares to institutional investors or to the public will also help it conform to rules on a minimum public holding of 25%.
The Essar Oil stock has lost heavily in the last one year, but still commands premium valuations if one considers the December quarter losses. If that was to be ignored as extraordinary and one-time in nature, its price-to-bookvalue (P/BV) of 1.13 and a price-to-earnings multiple (P/E) of 11.8 are in line with its peers such as Reliance Industries, MRPL and Chennai Petroleum.
A lot will depend now on Essar Oil’s ability to repair its balance sheet. However, considering its existing debt burden, raising funds is not going to be easy. A dampened outlook over the global refining industry is not going to help either.
KEY POINTS The ruling has resulted in the company post nearly . 4,000 crore of net loss in the December ’11 quarter
Considering its net worth was just . 6,840 crore at the beginning of the quarter, a large chunk of it has now been wiped off
The recent completion of its refinery expansion provides some hope. The company’s refining capacity is now 70% higher at 18 million tonnes annually
The company plans to borrow $400 million in foreign currency to reduce its interest burden
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