ESSAR OIL Co’s Huge Debt a Key Concern

The huge loss reported by Essar Oil in the quarter to June was on expected lines, as its growing dollarised debt necessitated mark-to-market losses on rupee depreciation. Yet this is a notional loss. However,the key concern is the company’s failure to reduce its debt, partially due to small tranches of capital expenditure that it incurs and sales tax liability installments. Essar Oil’s net loss of . 863 crore was mainly on account of a write-off of . 913 crore towards mark-to-market foreign exchange losses. The operating profitability was also down because of an adverse movement in its raw material prices, which depressed its gross refining margins, or GRM — the differential between revenues from finished products and cost of raw materials or crude oil per barrel. The company posted a GRM of $7.01 per barrel for the June quarter, down from $9.06 in the March quarter and $9.75 in the December 2012 quarter. Refining is a cyclical business. Declining GRMs, therefore, should not be a cause of worry. In fact, there are indications that the GRMs for the July-Sept quarter will be better compared with the June quarter. Essar Oil’s foreign debt, which was at $481 million at the end of March, has risen to $821 million now given the rupee’s depreciation of over 10% in the June quarter. On the flip side, this will mean the company’s inventories will fetch a higher price and the GRMs will translate into higher profits in rupee terms. What will also help is that the company will need to raise $450 million less when it converts its remaining $2.5-billion debt to a dollar-denominated one. The company’s debt of Rs 21,751 crore at the end of March translated into $4 billion then; it is $3.56 billion now. Essar Oil was not able to reduce its debt during the June quarter as it incurred some capital expenditure on refinery and also met its sales tax repayment liability. Its E&P business, particularly the CBM blocks, is in a growth phase and needs significant capital expenditure. The company’s ability to generate more cash over and above these commitments will determine how fast it can reduce its debt burden. Similarly, its ability to achieve full dollarisation of debt will lower its interest burden and extend the overall tenure of its debt, boosting liquidity.