Essar Oil eyes reasonable debt/EBITDA figures in next 2yrs

LK Gupta, MD & CEO of Essar Oil believes that the company will be able to reach a reasonable debt to EBITDA figure in next two years. He told CNBC-TV18 that the firm has already completed all its major capex and in last four quarters it has been generating sufficient EBITDA.

Also read: Veerappa Moily hints at 1 time diesel price hike Below is the verbatim transcript of his interview to CNBC-TV18 Q: Your EBITDA number at Rs 1100 crore has been higher than what you all did last time around. Take us through the margin performance – the gross refining margins (GRMs) at USD 7 per barrel and whether it is sustainable going ahead? A: This quarter we have just declared our results. The margin is USD 7 per barrel and EBITDA is about Rs 1100 crore against negative figure. What is important is that this EBITDA of Rs 106 crore is inspite of the USD 5 decrease in the crude oil prices and product prices and inspite of the foreign exchange variations. We have a foreign exchange variation of about Rs 913 crore and almost Rs 700 crore out of it is something which is just an MTM provision which is going to be realised in next quarter balance of the year. So, on a year basis that Rs 700 crore is completely realizable. So, our prudent risk management policy has really helped us in this quarter. Q: Can you just give us some guidance on your GRMs, what level do you think is a sustainable average that you could work with possibly in the next couple of quarters at least? A: Normally we refrain giving a number as far as GRM is concerned. However, what I always say is that we are now at a stage where we are USD 7-8 better than the international energy agency (IEA) benchmark based on oil methodology. So, today what market you are seeing again the cracks have been very healthy level – diesel is almost USD18-19 and ATF is also USD 18-19. This sort of levels are now going forward should remain and if that remains then our superiority to the benchmark number should remain at USD 7-8 minimum. This should translate let say if the IEA number you take about a dollar should be about USD 7-8 minimum. Q: If you look at the balance sheet your debt and your interest expenses continue to rise. If I am looking at the numbers, this time around your finance cost has risen to Rs 946 crore versus Rs 884 crore same quarter last year. How are you planning to reduce your interest costs in the quarters to come? I understand that you are looking to convert your high cost rupee debt into dollar debt. Just tell us about the game plan in terms of reduction in interest cost? A: As you are aware we are actually working on a plan where we will convert almost USD 3.9 billion of rupee loan into the dollar borrowing. We have already converted roughly about USD 800 million plus into the forex borrowing out of which about USD 480 million we had converted last time. That reduction in interest is happening, why we are not able to see in this quarter is actually if you see the net interest income (NII) minus this we are about Rs 700 crore plus. Going forward we are definitely going to see reduction in our interest costs from this level once we convert our full rupee loan into dollar borrowings. Here I must point out one thing that although this delay was not intentional, but by delaying our conversion from rupee to dollar borrowing simply in one quarter we have gained something about USD 400 million. So, the total borrowing which was about USD 3.9 billion is just USD 3.5 billion today. Q: In terms of a year end target - may be in terms of your debt to equity what would you like to see it at and hence any sort of guidance that you can give us in terms of what the debt to equity could possibly reduce to going forward? A: We do not have any major capex programme now. So, all our major capex we have already completed. In last four quarters we have been generating sufficient EBITDA and going forward once our interest expenses are slightly reduced, we can reduce almost USD 150-200 million. So, all these generations are going to reduce our debt. We feel that in next two years time we should be able to reach a reasonable figure of debt to EBITDA.