Stock Review: ESSAR OIL

It was mainly the strong refining margins that boosted Essar Oil's profit margins and profits in the June '11 quarter. After years of losses, the company is finally placed in a promising position with improving cash flows and projects achieving critical mass. Challenges still remain, but the achievements so far indicate the company will overtake them soon.

Improved global refining scenario during the June '11 quarter helped Essar Oil improve its gross refining margins (GRM) to $7.38 per barrel compared to $5.79 a year ago, but lower than $8.15 in the March '11 quarter. The operating profit margins improved to 5.8% from 3.8% of last June doubling the operating profit. Better working capital management helped lower interest cost burden by 5%, while the depreciation stagnated. Considering the write-back towards the minimum alternate tax (MAT), the net profit stood at . 469 crore. The company's key projects have entered the final lap and will commission 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 a 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 went into corporate debt restructuring in FY05, this was the first time it posted four consecutive quarters of profits. This gives the company confidence to expedite its exit from the CDR before March '12. The company is now being valued almost 20 times its profits for the past 12 months.

A high debt burden still remains a key woe for the company, which paid a steep . 1,214 crore towards interest in FY11. Still, its 2:1 debt-equity ratio at end FY11 was the best in the past 10 years. It is trying to raise $1.5 billion in external commercial borrowings to bring down its interest costs.

A key positive for the company 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 7-year income tax holiday under section 80-IB.