Focus going forward will be more on city outlets: Essar Oil

In an interview with CNBC-TV18’s Nayantara Rai, LK Gupta, MD and CEO,  Essar Oil shared insights on the company’s financial performance and the road ahead.Below is the edited transcript of the interview on CNBC-TV18:

Q: The net profit figure has come above street estimates. What went right with the company in the quarter?A: Q3 results have been very good for us on many fronts. First, our refinery produced excellent results in the sense that we have used 98 percent of heavy and ultra heavy crude. We have still produced 84 percent of light and middle distillates. This has lead to a premium on the International Energy Agency (IEA) benchmark margins of USD 9.33 in this quarter.Our refining margin for this quarter was USD 7.93. Although it was lower than the last corresponding quarter and that was mainly because the IEA benchmark margin itself has collapsed virtually by USD 2.16. So, in that light our performance in this quarter is very satisfying. Q: Are you disappointed with your gross refining margins because that has narrowed from USD 9 to about USD 7?A: What we are very happy about is that our premium over the IEA benchmark margin has gone up almost at USD 9 plus 33 cents. While you are right that the absolute terms the GRM is USD 7.93 versus USD 9.75. This is all because that the IEA benchmark margins have come down by roughly about USD 2.16. So, in general the market was not so good. However we have been able to maintain our superiority to the IEA margins.Q: One of overhangs on the stock of course, has to do with the sales tax issue – the order that had been passed by the Gujarat High Court. The last update we had was in the month of November 2013 when the Supreme Court had rejected your plea for delaying the timeline as far as that sales tax payment goes. Can you update us on this?A: You are aware that Supreme Court has given us 8 installments and 5 of them we have already paid and only 3 are remaining. By October 2014, those remaining three also are going to be paid. As far as we are concerned now, sales tax issue is behind us.Q: How much is left that has to be paid?A: We have now 3 installments and each installment is roughly about Rs 645 crore.

Q: You had successfully exited the CDR as well. After that I understand the company wanted to bring down the cost of its domestic debt. You were looking at converting some of that into dollar loans as well. Where do things stand at the moment?A: By end of this quarter, we have converted roughly about USD 900 million (rupee to dollar loan) borrowings. As we have been sharing that we have RBI’s approval up to USD 2.27 billion, we are in touch with various domestic institutions and foreign institutions. Post CDR there has been lot progress. Going forward we expect that with this USD 2.5 million of dollarization programme, we should be able to execute in quarters to come.Q: Are you looking at perhaps expanding your retail business? We have been seeing petrol prices pretty much behaving in a deregulated manner. We are seeing monthly diesel price hikes. So, is a company like Essar Oil now looking at retailing fuel?A: Deregulation of petrol and diesel is very much a reality. For almost 15 months now, we have been completely on market driven prices for petrol . Diesel has risen 50 paise per month for almost 14 months continuously. We are definitely reconsidering our retail plans. We have a model of franchise owned franchise operated. We are now rethinking in terms of remodeling our strategy more towards company owned company operated, company owned dealer operated. Our strategy going forward is that we concentrate not only on diesel but also concentrate on increasing the petrol sale because petrol demand is continuously growing in India by almost 8-9 percent. Our focus now will be more towards capitalizing on this demand and definitely we are going to expand our retail network in times to come.Q: Can you give us an idea of when you are looking to do this expansion? Since you want to move from franchise to company owned dealerships have you started indentifying sites, what has been the progress made so far?A: We have already started working on our retail plan. About 3-4 months back we had given an advertisement in the newspapers where a lot of people have come forward and contacted us, our teams are working on it. We definitely look forward to expanding our retail network and our focus now is going to be more towards city outlets; more towards outlets which are petrol dispensing and of course, not losing the sight that ultimately the volumes are going to come from diesel. Therefore the retail outlets also have to be towards diesel. Q: April 1 2014, the new gas price formula will come into effect. What does this mean for Essar Oil? Are you looking to increase your gas business as well?A: We have a Coal Bed Methane (CBM) production business which will be mainly directed towards gas based fertilizer plants. The issue of gas pricing is now resolved. For our gas business, the prices will be based on revised guidelines. We are presently developing Raniganj block and we also have a few blocks in the exploration and development stage. Once these revised price guidelines are introduced, the gas business in India is going to expand.

Also read: Essar's US coal arm out of bankruptcy on $150mn infusion