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Essar Oil: strong quarterly results but debt weighs heavy

LiveMint logoLiveMint 21-05-2014 Pallavi Pengonda

Strong gross refining margins (GRMs), decline in finance cost and a forex gain enabled Essar Oil Ltd to deliver good numbers for the quarter-ended March. Revenue increased by about 7% over the same period last year to `25,274 crore. That’s slightly better than the revenue growth seen in the December quarter. The company processed 5.05 million tonnes in the March quarter, operating at more than 100% capacity consistently after the completion of its expansion projects.

The refining operating environment was better than in the previous quarter and that was expected to reflect in the performance of refiners. Investors will recall that Reliance Industries Ltd (RIL), too, performed well on refining margins in the March quarter. Essar Oil was no exception. The company’s current price GRM improved to $10.12 per barrel last quarter compared with $9.06 a barrel a year ago.

That, along with about 25% year-on-year decline in finance cost and a forex gain helped it post a net profit of about `1,000 crore for the March quarter compared with `200 crore in the same period last year.

While that’s remarkable, its balance sheet stands on shaky ground. On a consolidated basis, Essar Oil’s debt stood at around `21,000 crore on 31 March, translating into a debt-to-equity ratio of as high as 8.5. Essar Oil’s latest market capitalization is `12,973 crore.

Higher debt also means higher burden of finance costs. Sure, interest expenses declined in the March quarter but for the last financial year, finance costs accounted for a little less than two-thirds (63%) of the operating profit, affecting net profit substantially.

The good news is that the stock showed enthusiasm in the run-up to the election in keeping with other stocks in the industry. Its shares have outperformed the S&P BSE Oil and Gas index and the benchmark S&P BSE Sensex since 1 January.

Investors need to watch Essar Oil’s debt dollarization (converting rupee debt to foreign currency denominated debt) plan that is aimed at reducing interest costs. A decline in debt should be encouraging.

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