Promoters' FCCB conversion to boost networth: Essar Oil

Lalit Kumar Gupta, chief executive officer, Essar Oil says the company’s promoters are converting the Foreign Currency Convertible Bond (FCCB) in order to boost the company’s networth.

Speaking to CNBC-TV18, Gupta says the FCCBs will be converted at an average price of Rs 130 and Rs 153 in two different tranches. Also read: Essar Oil to shut crude and secondary units for a week
Additionally, Gupta says that the company has high interest costs of Rs 3000 crore per annum, but it is likely to be reduced substantially by USD 150-200 million (Rs 15-20 crore). Below is the edited transcript of Gupta’s interview to CNBC-TV18.  Q: Take us through the Foreign Currency Convertible Bond (FCCB) conversion because it’s a large amount USD 260 million and the promoters will be converting these FCCBs at three times the market price or 2.5 times the market price?
A: Last year our promoter company had decided to convert optionally convertible debenture into compulsory convertible debenture in order to make sure that our networth is improving. Now they have decided to convert compulsory convertible debenture into equity and accordingly, they have given us notice. They are converting almost at an average price of Rs 130 and Rs 153 in two different tranches. So, USD 260 million will now get converted into equity and will definitely boost our networth. Q: What are the pending FCCBs that Essar Oil has and what are the timelines of conversion and who would they be issued to. Would it only be the promoter company?
A: USD 260 million which is getting converted for which we have received a notice from our parent company, Essar Energy Plc, is getting converted immediately and thereafter we do not have any other remaining FCCB for conversion. Q: The thing that stood out from your numbers last time was the below EBITDA numbers. You had interest cost on one side, which are decent but you have forex element, which is still impacting your numbers. How would both of these numbers pan out as you go forward?
A: We have clarified earlier in great detail that the foreign exchange variations which we show in our accounts, they are mark to market (MTM) provisions which get realised in the next quarter so they generally are to be seen in the context that they are accounting policies and not necessarily the losses.
Yes, there is interest of about Rs 3,000 crore plus as of now. About 100 percent of our revenues and expenditures are in dollars and so our earnings are also in dollars. Our natural currency is dollar so we are converting this which will substantially reduce interest by USD 150-200 million. Therefore, going forward we expect that interest burden should come down. In Q2 interest started showing some declining trend because of this conversion.
We have set up Essar Oil totally at USD 5 billion and today our debt including even sales tax is about USD 3.5 billion. So, if one sees it in context it is absolutely in control and once we convert interest expense into dollar loans, it is going to be within the limit. Q: How much it could reduce in FY15?

A: Our present target is to convert about USD 2 billion into foreign currency and if we take saving of 6 percent, at least USD 120 million interest amount should go down further.

Q: Your gross refinery margins (GRMs) were also positively surprised the market in Q2. What has been the trend in Q3 so far?

A: Q2 was a monsoon quarter in India and this time we had robust and good monsoon so India exported lot of diesel, which also helped in depressing the market in Q2. Although Q3 began with a slightly depressed note but now we are finding that margins are coming up and the quarter is now looking good.