Hope to complete CDR process by this quarter-end: Essar Oil

Essar Oil has completed its Optimisation Project four months ahead of schedule. It has taken the capacity of its Vadinar Refinery in Gujarat to 20 MMTPA, or 405,000 barrels per day.

In an interview to CNBC-TV18, LK Gupta, managing director and chief executive officer of Essar Oil says, coal based power plant to supply power to the refinery is expected to be completed by June-end.

Going forward, he says, the company’s profitability is going to be very strong. “We feel that maybe in next 18 to 24 months, we should be able to achieve a reasonable target of 2:1 debt-equity,” he adds.

CDR process, he says, is just in the final last leg of completion. “We hope that by end of this quarter we should be out of CDR,” he adds.

Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying video.

Q: The coal based power plant to supply power to the refinery is also expected to be commissioned very soon. By which quarter do you see refinery margins see a material improvement because of this?

A: Coal based power plant is expected to be completed by June-end. We expect that the normal coal based power should be available to us by July. Therefore, the improvement on account of coal based power should be visible from September quarter.

Q: What’s the outlook on overall global refining margins? Do you see a risk of further weakness, given the demand outlook?

A: As far as the refining GRMs are concerned, the complex refineries are to a large extent protected because they are able to have processing capabilities of heavy, ultra heavy and light crude; all types of crude.

However, the Euro crisis has impacted the margins to an extent. But the margins going forward are expected to be stable, to improve in short to medium-term, particularly because that margin is a difference of crude prices and product prices. So, while it is true the product prices are reducing, it is also equally true that crude prices are also seeing a declining trend.

Q: The concern around Essar Oil has been with that large tax payment to the Gujarat government. Any development on that front either in terms of whether the installments have been worked out, what exactly the rate of interest will be over here?

A: We have gone to the Gujarat High Court filing a writ. Under the writ, the next hearing schedule is on June 22. However, the High Court has given liberty to the government to concede our request for installment and interest. So, once the Gujarat government starts discussions, we will definitely get in touch with them to seek resolution on this issue. Beyond that, the matter is sub-judice, I cannot say much about it.

Q: Whatever maybe the schedule of payment, is funding adequately tied up for the company to that regard?

A: The discussions are on. So, I would not like to make any conclusion at this stage. However, whatever repayment schedules we finally agree, all I can assure you is Essar Oil will honor its commitment.

Q: The high leverage that you have seen because of the sales tax refund has been a concern with investors for a while. Given that the expansions are now in place, by when do you expect to bring down your debt levels to more reasonable level?

A: There are two-three things which we are doing to address this. One is that our parent company Essar Energy PLC converted its optionally converted debentures into compulsory convertible debentures. That has increased our equity by Rs 1,400 crore for all practical purposes. At the same time, reduce the debt by Rs 1,400 crore.

Second, we are also considering equity to improve liquidity in our stock. That will be over 600 million. We have now commissioned our 20 million tonne refinery complex to the extent of 11.8. Going forward, our profitability is going to be very strong. Therefore, we feel that maybe in next 18 to 24 months, we should be able to achieve a reasonable target of 2:1 debt-equity.

Q: Could you give us an update on the discussions with the banks involved in the CDR process? Where do things stand? Will you be able to exit CDR by end of this quarter perhaps?

A: We have virtually completed the process. Two out of the three steps, which are required, are over. It is just in the final last leg of completion. We hope that by end of this quarter we should be out of CDR.