Monday, May 13, 2013

Huge Debt Pile a Big Burden for Essar Oil

Essar Oil’s results for the quarter to March were almost similar to those of the preceding couple of quarters. The company has stabilised its operations and the key booster to earnings will come from dollarisation of its debts, which should take three to six months. Investors need to wait for deleveraging of its balance sheet and strong bottom line growth. Essar Oil’s net profit for the March quarter at . 200 crore was better than in the quarter to December, when it reported a profit of . 32 crore.
Since the company is operating a much bigger and better refinery now than a year ago, comparing the sequential numbers will provide a better picture, instead of the normal year-on-year comparison. On the key variable of gross refining margin at current prices (GRM), Essar Oil posted a marginally lower number at $9.06 per barrel against $9.75 in the December quarter. The gross refining margin is the differential between crude oil cost and price of refined products and represents the main source of income for a refinery.
Essar Oil also saw its interest costs inch up to . 920 crore, 4.3% higher than . 882 crore in the December 2012 quarter. In addition, the company’s exit from CDR necessitated a one-time write off of . 111 crore. The company ended the 
whole FY13 in loss and, hence, had no tax liability. That the company was still able to show an improvement in net profit in the March quarter was owing mainly to the foreign exchange gain of . 25 crore against a loss of . 345 crore in the December 2012 quarter. “It was one of the rarest quarters since we had neither the forex losses nor inventory losses,” said Suresh Jain, chief financial officer of the company. With its major capex over, the main goal for the company remains paring of its huge debt, which is still more than seven times its equity. It sucked out . 3,424 crore from its operating profits as interest cost in FY13. The company’s aim to replace its rupee loans with external commercial borrowings (ECB) to the tune of $2.27 billion would save it nearly . 1,000 crore in annual interest costs.
The company also reported operating profits (EBIDTA) of . 3,966 crore in the latest three quarters, when the refinery expansion was completed.
“We are in a position to generate $1 billion at EBIDTA level every year,” said LK Gupta, managing director of the company. Ultimately, it is these earnings that would help it lower its debt pile.
The company has indicated it will take 3-6 months to raise the necessary foreign borrowings, which will lower interest costs. Still, it should take 2-3 years to fully de-leverage its balance sheet. The current share price mostly discounts these factors and investors will need to wait to see any significant appreciation from the current levels.

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