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

Essar Oil, India’s second largest private refiner, reported a higher-than-expected loss for the first quarter of FY13. Net loss came in at Rs 1,400 crore, as against a profit of Rs 469 crore in the year ago period.

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. _PAGEBREAK_ Q: What about the current strength in the refining margins, do you see this strength sustaining? A: Current margins have been boosted because of some refinery shut downs in different part of the world and also in India. I think present margins are quite robust and quite good. Going forward there can be some moderation from the present level, although we do expect refining margins to be stable and robust in nature. Q: So if the benchmark is at USD 11 per barrel right now, do you see it stabilizing at USD 8-9 per barrel? A: I think USD 8-9 per barrel should be a fair assumption. Q: Post the CDR exit, what would be the debt reduction plan with regards to the company and what is the sustainable interest cost that we could see on a quarterly basis? A: Today we have debt of almost Rs 14,700 crore, out of which I think about Rs 9,400 is something which was covered under the corporate debt restructuring packet. Now post the exit of CDR, we are working towards refinancing of all these debts by dollar denominated debts. As you know, refining companies in India are almost dollar denominated in terms of their revenues. RBI also has recently allowed companies to take external commercial borrowings to the extent of 50% of their last three years of exports, which is almost USD 1.5 billion in our case. So going forward, once we are able to restructure our debt, we will have substantial savings expected on this account. Q: So on a quarterly run rate what can we expect? A: Once we have completely refinanced our debt, then you can expect saving of roughly USD 150 million in a year. Q: What is the status of the sales tax deferral case? You haven’t provided for the interest cost on that. Are we likely to see any kind of provision in the forthcoming quarters and also what is the stage of discussion with the Gujarat government on that? A: As far as sales tax is concerned, after the Gujarat High Court not considering our petition, we have gone to the Supreme Court under Special Leave Petition (SLP) and that is now in the process of being heard. We have sought installments of payments and we have sought remission of interest under that SLP. Beyond that, at this stage the matter is sub-judice. Q: Your debt to equity is at 7 times, so is dilution in the near term possible, in this year- 2012? A: As far as equity is concerned, I think immediately we have no such plans because we already have a standby facility of almost Rs 5000 crore in the event that sales tax liability is to be paid. If installments are allowed, then definitely there is no issue because going forward we see very robust cash generations from the company, so we should be able to take care. Once we actually restructure our debt portfolio and the cash generations come, we feel that in any case our generation should be sufficient to address this debt equity correction. As you are also aware, our parent company had already agreed for converting optionally convertible debentures to compulsory convertible debentures, which is almost Rs 1,400 crore. So going forward I think we have no immediate plans. But in future there is a requirement to reduce the promoters’ equity to 75% by June 2013. At that point of time we may consider, but as of now I don’t think we have any concrete plans for issue of equity.