Nov 12, 2012 03:49 PM IST | Source: CNBC-TV18

We will focus on debt reduction: Essar Oil's CEO

Essar Oil will focus on reducing debt in the ensuing quarters. L.K Gupta, the company‘s managing director and CEO told CNBC-TV18 the net debt burden has gone up by about seven percent, QoQ to Rs 15,000 in the September quarter.

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Essar Oil will focus on reducing debt in the ensuing quarters. L.K Gupta, the company's managing director and CEO told CNBC-TV18 the net debt burden has sequentially gone up by about seven percent in the July-Sept quarter to Rs 15,000 in the September quarter.

Gupta further said that the company had borrowed funds for partly paying sales tax obligation which it had to the Gujarat government and partially will be toward working capital requirement.

He further said going forward the company's EBITDA performance will improve on the back improved efficiencies.

The company has recently reported a net profit of Rs 105 crore for the September quarter as against Rs 166 crore loss, YoY. Net sales of the company grew 62% to Rs 20,963 crore, YoY on improved volumes.

Below is the edited transcript of Gupta's interview with CNBC-TV18.

Q: Can you tell us what led to GRM of around USD 7.9 per barrel? What is your guidance for the remaining part of the fiscal?

A: This second was the first quarter after we have completed optimization and expansion projects. Optimization was completed in June four months ahead of schedule. This is the first quarter where our capacity and complexity got fully reflected. We produced almost 5.07 million tonne of throughput in this quarter reflecting 20 million tonne capacity. The use of ultra heavy crude has gone up almost 4 times.

In this quarter it was 64 percent versus 15 percent in the corresponding quarter. Despite that we produce 82 percent middle and light distillates in our product slate as against 72 percent. So, a combination of all this reflected in higher margins. Also, domestic sales in this quarter were almost 70 percent versus 55-56 percent in the corresponding quarter.

Q: Your coal-based power plant at Vadinar has become operational, how much more do you think your GRMs could improve by the end of FY13?

A: The coal based power plant has become fully operational on November 9. This quarter should see the complete reflection of the coal-based power plants. The middle distillates cracks are also at a very healthy level.

Based on the old methodology of International Energy Agency (IEA), our GRMs should be always about USD 7-8, ahead of that. Today the IEA margins are about USD 1-2. So going forward, if one takes USD 1-2 and USD 7-8 over and above it, one can calculate the likely margin.

Q: Could you give us some guidance with regards to what the debt burden would look like at this point in time and what would be the company’s guidance with regards to reducing the debt burden, hence what would the interest cost look like for the second half of the fiscal?

A: The debt burden of the company was about Rs 14,000 crore and in this quarter it has gone up by about Rs 1,000 crore. We have borrowed for paying the sales tax. Rest is all for working capital. Interest is about Rs 700 crore, which includes not only interest on term loans, but working capital and also hedging cost.

We are now 20 million tonne refinery with almost 11.8 complexity and if one considers the margins I talked about, we are going to look ahead for a substantial amount of EBITDA. With that, our total focus is going to be on debt reduction, correcting leverage.

Q: Some analysts expect your EBITDA and FY13 to reach about Rs 3,880 crore, is that too aggressive an estimate or because of the reasons you alluded to your EBITDA figure could get to that ballpark figure for around Rs 3,800 crore or so?

A: In this quarter we had a current price gross refining margin (CPGRM) of about 7.86. With complete reflection of the coal-based power plant in this quarter, so the next quarter is going to be all benefits. We should be very close to that number.

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