Interest Cost Cut to Help Sustain High Valuations

Essar Oil’s results were lukewarm for the quarter ended December 2012. The earnings report was marked by a net profit of . 32 crore, despite the oil refiner’s highest ever gross refining margins at $9.75 per barrel.
The company management has blamed foreign exchange fluctuations for pulling down profits, while interest costs ate away over twothirds of its operating profit.
In a conference call with analysts, Essar Oil’s chief financial officer, Suresh Jain said that the EBIDTA and PAT would have been higher by . 260 crore in Q3 if not for the forex gain accounted in the previous quarter, which showed up as lower sales realisation during the quarter.
While interest costs shaved off . 882 crore or nearly 71% of its . 1,242 crore of operating profits, or EBIDTA, this proportion was substantially higher compared with 63% in the September 2012 quarter. The company maintained its operational efficiency from the preceding year running the refinery at full utilisation while bettering the previous record margins posted in the last quarter.
Its current price gross refining margins (CPGRM) was at a record high of $9.8 per barrel compared with $7.9 in the September 2012 quarter. It also maintained 84% diet of heavy and ultra-heavy crude oils, with 85% of the product slate in the profitable light- and middle-distillate categories.
As the refining company has completed all its major capital expenditure, its quarterly earnings will remain linked to the capacityutilisation level and margins it can bring home. It is attempting now to pare its interest costs and is in the process of arranging foreign borrowings. Essar Oil, according to the CFO, has secured a higher limit for its foreign borrowings — from $1.5 billion to $2.2 billion — which is a large chunk of the $2.8-billion loans it currently has on its books and could lead to a saving of $140-150 million annually on interest cost. Essar Oil has gained over 32% on the bourses over the last six months on hopes of a turnaround. Its enterprise value is currently nearly 13.5 times its EBITDA for last 12 months. The company’s efforts to bring down its interest cost may help sustain the valuations at the current high level.