Essar Oil: Tax exemptions add the glitter

Essar Oil: Q1 FY10 Results

Despite a difficult economic condition, 18-day refinery shutdown, a substantial fall in the net sales and other income, Essar Oil posted surprisingly superior results for the June 2009 quarter. Its profits before depreciation, interest and tax doubled while net profit jumped more than five times to Rs 169 crore compared to the similar period of last year. The secret lay in the tax benefits it enjoys. The company is eligible for sales tax deferral benefit worth $1.8 billion by August 2020 and a 7-year income tax holiday under section 80-IB.

At a time when the gross refining margins – the differential between the cost of crude oil and selling price of the refined products derived from it – have weakened globally, Essar Oil posted a respectable $6.74 per barrel of GRM. This was made possible by optimised crude oil mix and reduction in low-value products. During the June 2009 quarter, the company increased the proportion of sour and heavy crude varieties to 70% of total from 60% last year, while the production of heavy distillates dropped to 26% from 33% earlier.

However, this was not the only reason for the strength in the company’s GRMs. Nearly one-sixth of the company’s domestic sales took place from the retail outlets, which earned Rs 2400 per tonne (approx. $6.7 per barrel) marketing margin as the company is allowed to collect sales tax but is not required to pay it to the government till 2020.

The sales tax deferral benefit added Rs 210 crore to the company’s pre-tax profits, while due to the income tax holiday it had to provide tax at just 16.7% of pre-tax profit under Minimum Alternative Tax (MAT) scheme. The June quarter PBT was also strengthened by Rs 30 crore increase in value of inventory due to a change in valuation method.

The company is currently running its 10.5 million tonne per annum refinery at 133% capacity utilisation. 84% of this volume is sold domestically and the rest is exported. The company has re-opened all its 1300 retail outlets to be scaled up to 1500 outlets by March 2010.

The company is currently expanding its existing refinery to 16 MTPA by December 2010 and adding another 18 MTPA refinery by December 2011. With the recent Union Budget extending the income tax holiday for petroleum refining projects to March 2012, both these projects will benefit. The company is currently carrying a debt of $3 billion and will raise another $2.7 billion for the expansion, while $1.7 billion will be invested as equity.

The company is expecting to commission commercial production of coal-bed-methane from its Raniganj block from December 2009. The company has drilled 15 wells and plans to drill another 75 wells in FY2010 at an investment of $21 million. Over next three years, the output from this block is expected to reach 2.5 million metric cubic meters per day (MMSCMD). At current price of natural gas, this will add Rs 700 crore to company’s topline on annualised basis. The company’s investment plans will fructify over next three years, which will establish it as a major energy player not just in the country but in the world.