Buy Essar Oil; target of Rs 168: LKP

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Buy Essar Oil; target of Rs 168: LKP

LKP is bullish on Essar Oil and has recommended buy rating on the stock with a target of Rs 168 in its July 12, 2011 research report.

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LKP is bullish on Essar Oil and has recommended buy rating on the stock with a target of Rs 168 in its July 12, 2011 research report.

"Essar Oil's Q1 FY12 results were better than expectations on the topline & bottomline fronts due to a combination of higher product prices, lower interest expense & recognition of MAT credit. Net sales increased 42.2% yoy and 12.5% qoq to `150,240 mn mainly on account of higher product cracks yoy, led by diesel. Throughput for Q1 FY12 was 3.62 MMT, translating into capacity utilization of 135%. Exports stayed at 32% of sales, led by fuel oil which is getting replaced by natural gas in the domestic market. Currently, gasoline & fuel oil account for the bulk of exports. Retail sales dropped further to 1% of sales, which was due to controlled pricing of auto fuels during the quarter. Currently, the regulated price of petrol is in line with global prices, which should drive a jump in retail sales of petrol going forward."

"The refinery expansion project has achieved an overall completion of 92%. The expanded refinery of 18 MMTPA will achieve mechanical completion during Q3 CY11. The Delayed Coker Unit is expected to achieve mechanical completion during Q4 CY11. The refinery will be taking a 35-day shutdown from Sept 18 onwards for revamp & tie-in of the units and routine maintenance. There would be no production from the refinery during this period. The company is trying to build up inventories to service its clients during this period. The refinery optimization project, which envisages further expansion of refining capacity to 20 MMTPA, has achieved completion of 56% and is expected to be completed by Sept 2012. The management has indicated that a complete refinery shutdown won't be required prior to using the expanded capacity of 20 MMT. On the E&P front, the company has conveyed that some clearances for the Raniganj CBM project haven't been given yet. Post obtaining the necessary approvals, commercial sales of CBM gas would commence."

"Currently, production is being kept at low levels of 33,000 scmd. The company will drill 500 wells throughout the life of the field and expects to convert the best estimate resource of 792 bcf to 2P/2C reserves. The company has already entered into a long term contract with Matix Fertilizers for 2.8 mmscmd for 20 yrs. The company has also tied up with local customers from the Durgapur Industrial Estate for offtake of gas. We assume long term Brent crude price of $95/bbl and Singapore GRM of $6.5/bbl going forward. We estimate core GRM of $6.4/bbl and $7.4/bbl in FY12 & FY13 respectively. We estimate sales tax benefit to add $2.5/bbl & $2.3/bbl to the GRM during FY12 & FY13. Hence, we expect the company to earn gross GRM of $9/bbl & $9.7/bbl during FY12 & FY13. We estimate the refinery expansion to result in the company earning a premium to the benchmark Singapore GRM. We forecast net sales of `513,804.9 mn and `602,690.5 mn in FY12 and FY13 respectively. We expect EBITDA to double from `27,800 mn in FY11 to `56,084.4 mn in FY13."

"We estimate PAT of `11,378.6 mn and `24,217.2 mn in FY12 and FY13 respectively. We expect EPS to jump from `4.8 in FY11 to `8.3 in FY12 and `17.7 in FY13. Post expansion, we see net debt/equity falling from 1.7 in FY11 to 1.3 in FY13. We expect free cash flow to turn positive in FY13 at `2,385.6 mn buoyed by strong operating cash flow of `21,604.9 mn. We maintain our FY12E target price of `168, which translates into an upside of 31%. We value the company by using SOTP valuation. We value the refinery at 6.25x FY13E EBITDA and the Mehsana and Raniganj blocks using DCF. We value the Ratna/Rseries & Nigerian blocks using EV/boe multiple. We retain our BUY rating on the stock with a target of Rs 168," says LKP research report.

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