ESSAR OIL Cash Flows Promising but Higher Debt a Worry

It was mainly strong refining margins that boosted Essar Oil’s profit margins and profits in the June ’11 quarter. After years of losses, the company's prospects appear promising with improving cash flows and projects achieving critical mass. Challenges still remain, but the achievements so far indicate that the company could overcome them soon.
Improved global refining scenario during the June ’11 quarter helped Essar Oil improve its gross refining margins to $7.38 per barrel against $5.79 a year ago but lower than $8.15 in the quarter to March ’11. Operating profit margins improved to 5.8% from 3.8% last June — a doubling of operating profit. Better working capital helped lower the interest cost burden by 5%, while depreciation stagnated. Considering the write-back towards minimum alternate tax or MAT, net profit was . 469 crore. The company’s key projects are now in the final lap and will be commissioned in FY12. Its 14-million-tonne refinery is being expanded to 18 million tonne by December ’11, which will also make it more complex and enable it to process cheaper varieties of crude oil and thereby boost margins. Its CBM block in Raniganj is ready for commercial operations with the potential to generate annual revenues over . 1,250 crore by FY14 when the full potential of 3.5 million cubic meters per day is reached. For a company that embarked upon corporate debt restructuring in FY05, this was the first time it posted four consecutive quarters of profits. This provides the company confidence to expedite its exit from corporate debt restructuring before March ’12. The company is now being valued almost 20 times its profits for the last 12 months.
A high debt burden still remains a key concern for Essar Oil which paid a steep . 1,214 crore towards interest in FY11. Still, its 2:1 debt-equity ratio at the end of FY11 was the best in the last 10 years. Essar Oil is now trying to raise $1.5 billion in external commercial borrowings to pare its interest costs.
A key positive for the company all along has been the tax benefits it enjoys. Essar Oil is eligible for sales tax deferral benefit worth $1.8 billion by August 2020 and a seven-year income tax holiday under section 80-IB of the Income Tax Act.