Essar Oil will replace Rupee debt by ECBs: CEO

Essar Oil turned profitable in the December quarter  on strong gross refining margins which rose to USD 9.75/bbl as against USD 3.82/bbl,YoY.

L.K Gupta, the company's CEO also attributed the robust performance of the company to the expansion and upgradation seen during the quarter.
Also, this is the first quarter showing full impact of the capacity expansion to 20 MTPA (million tonnes per annum). In the previous quarter, the company had posted a GRM of USD 7.86 a barrel, a discount of USD 1.2 a barrel as compared to Singapore complex at USD 9.1 a barrel.
Meanwhile, Gupta said, "We benefitted from the increase in the gap between light and heavy crude apart from the record high refinery throughput."
Going forward,  Essar believes it will continue to optimise crude diet and product slate further to improve  earnings, creating greater stakeholder value.
Talking about the financials of the company, Gupta said the company has a debt of Rs 17,000 crore as on December 31 and the company is working to replace Rupee debt with external commercial borrowing to bring down interest cost.
For the December quarter, the company posted a net profit of Rs 32 crore as against Rs 362 crore loss, YOY. The company's net sales grew 14% to Rs 23, 817 crore, YoY. Below is the edited transcript the interview. Q: What kind of refinery expansion you had that led to this huge jump on your gross refining margins (GRM) and do you think those kind of GRMs are sustainable for the rest of calendar year?
A: Essar Oil has completed an expansion program in March 2012 and an optimisation project in June 2012 - almost four months ahead of schedule. This expansion had increased our capacity from 10.5 to 20 million tonne.
The optimisation and expansion together has upgraded the company from 6.1 complexities to 11.8 complexities. The full benefit of expansion and upgradation is reflected in this quarter. In this quarter we have run, 5.14 million tonne of throughput. So consistently, for two quarters, we have now run our refinery at over 20 million tonne per annum which indicates that expansion capacity is now fully realised.
In this quarter, the percentage of ultra heavy and heavy crude has gone up to 84% and more importantly the ultra heavy percentage has gone up to 67%. Even with this 84% of ultra heavy, we have produced a slate where light and middle high value products is 85% which was 69% in the corresponding quarter.
The third major factor was captive coal fire power plant. The first unit was started in second quarter and second unit was started in the third quarter. These three factors have been reflected in the current quarter results and our GRM has been 9.75 in this quarter versus 2.82 in the corresponding quarter and 7.83 in the second quarter immediately preceding.
The EBITDA has increased from Rs 148 crore to Rs 1,242 crore and profit after tax (PAT) has been Rs 36 crore versus loss of Rs 362 crore. Because of this capacity announcement, throughput announcement, our sales have been almost Rs 26,000 crore in this quarter which is also 86% higher. Q: While the operational numbers are extremely strong, the concern arises on interest cost. Could you update us on what your net debt levels are at this point? What are you pencilling in now in terms of a payout to the Gujarat government as taxes for the next couple of quarters?
A: Our debt at the end of this quarter stands at around Rs 17,000 crore. We have received the revised approval from Reserve Bank of India for raising USD 2.27 billion of external commercial borrowing (ECB) to replace the costly rupee borrowing by dollar borrowing. In regards to sales tax, with the Supreme Court decision - the matter got concluded and we were granted eight quarterly instalments to pay, Rs 5,000 crore of the balance amount.
We have paid the first instalment of Rs 1,200 crore on January 2, 2013. The remaining seven quarterly instalments will also be paid on due date. The sales tax matter is behind us now. Q: How soon will you look to raise ECBs or would you also look at diluting the two FCCBs that are still outstanding in terms of providing some debt relief your company?
A: As far are FCCBs are concerned, our parent company holds the entire amount of FCCBs. They have already agreed to make it compulsory convertible. So now, as far as Essar Oil is concerned, for us it is virtually equity because it has to be compulsorily converted anytime now up to 2026. As far as raising of dollar borrowing is concerned, we have the approval in place and we are working on it. Q: Would you look at any other instruments such as a QIP, in order to bring in some equity and provide some relief?
A: The only reason for us to raise equity was to provide for sales tax loan and also to comply with the Sebi guidelines. Sebi has come out very categorically mentioning that the global depositary shares (GDS) should not to be counted for this purpose which means that the promoter share holding in Essar Oil today, if you exclude the GDS is less than 25%.
Public shareholding exceeds 25%. We don't need to dilute any equity for meeting the Sebi guidelines. As far as sales tax is concerned, now we have two years period for paying the amount. Now, we have 20 million tonne refinery with 11.8 complexity.
We have already started showing the results, we have already started seeing the cash flows. We don't need anything. Besides this, we had Rs 5,000 crore standby line from banks so we don't need to raise any equity at this juncture. Q: What's taken analysts by surprise is USD 3 per barrel premium you have had to Singapore margins. Will this be an industry wide trend; you are beginning to see an improvement in margins generally?
A: We benchmark ourselves to IEA margins and not to Singapore margins generally because we are listed in the UK. The major reason for differential of USD 3 is because fuel oil has been very weak. Fuel oil gets reflected in Singapore margins. Since the complex refinery is similar to us who does not produce virtually any fuel oil, this differential will be seen if fuel oil remains weak.