Re, crude fall hurt margins; to improve in Q2: Essar Oil

In an interview to CNBC-TV18, managing director and CEO of the company, LK Gupta, said that the profitability of the company was hurt by falling crude prices and the sharp rupee depreciation during the quarter.

“The reason for the adverse results in Q1 is because of the fall in crude prices. It saw a steep fall of almost USD 30, from USD 125 per barrel in the month of March to about USD 95 per barrel by end of June. Secondly, that the rupee also depreciated by almost 10% during this quarter. So cumulatively, this has impacted the profitability of the company,” he explained.

Going forward, Gupta says the completion of their coal based power plant will help improve margins in Q2, but a full reflection of the expanded capacity will come in from the third quarter onwards.

Below is an edited transcript of his interview with Gautam Broker and Ekta Batra.

Q: It has been a steep loss for you this quarter. Can you give us a projection in terms of the bottomline for the remaining part of the fiscal?

A: This was the first quarter after the completion the expansion in the month of March. The throughput for the quarter is 4.5 million tonne approximately, which completely reflects the expanded capacity of 18 million tonne on annualized basis. Secondly, we have completed the optimization project on June 5, 2012, that is almost four months ahead of schedule. So now we are with 20 million tonne of refining capacity, with all our units stabilised and we are running our refinery today at 20 million tonne.

Coming to Q1 specifically, the gross refining margins of the company have really started reflecting the complexity of the refinery. We have been able to take almost 88-89% of the heavy and ultra-heavy crude and our distillate yields have gone up to almost 83% against 73%. The reason for the adverse results in Q1 is because of the fall in crude prices. It saw a steep fall of almost USD 30, from USD 125 per barrel in the month of March to about USD 95 per barrel by end of June. Secondly, that the rupee also depreciated by almost 10% during this quarter. So cumulatively, this has impacted the profitability of the company.

 Now besides this the tax incentive which was there in the corresponding quarter was not there in this quarter. Interest and depreciation also increased because the expansion and the optimization have completed. The real reflection of our complexity and GRMs will start getting come from the current quarter onwards. Going forward, we definitely expect that the GRMs must reflect much higher value.

Q: By when can we see stable state margins in your refinery, do you think Q3-Q4 will be a better indicator of what the refinery can deliver? Also, what do you make of the current strength in the refining margins and do you think that will sustain?

A: In our case, our expansion optimization has been completed. The only thing which is still pending, which is getting now completed in phased manner, is the coal based power plant. By the end of this quarter, the coal based power plant should also be completed. So you will definitely see a much better margins scenario in Q2, but from Q3 you will have complete reflection of our expanded capacity and complex.