Essar Oil Limited - Financial deleveraging to improve asset monetization - 1QFY14 Results Review - Antique

Net loss of INR8.6bn in 1QFY14 due to FX losses

Essar Oil Ltd (EOL) reported a net loss of INR8.6bn in 1QFY14, against our estimate of a net profit of INR803m mainly due to FX loss of INR9.2bn. EBITDA was 7% below our estimate at INR11bn due to lower than expected CP GRM of USD7/bbl down 23% QoQ but line with 24% QoQ fall in benchmark Singapore GRM due to end of seasonal winter demand and maintenance season in the west. Stronger FO spreads also pressured light heavy differentials in 1Q. Interest cost increased 3% QoQ to INR9.5bn inclusive of INR620m due to fair valuation of base refinery facility and INR400m for CDR exit. Management has pointed to notional M2M FX loss of INR6.9bn on inventories which is recoverable going forward through sales. OPEX was up 18% YoY (due to coal based power plant) though QoQ declined 10% to USD3.1/bbl.

Operating metrics stable

EOL's operating metrics were stable in 1Q with crude volumes of 5.14mmt implying 103% capacity utilization. Full benefit of expansion and optimization could be seen with crude slate comprising 92% of heavy and ultra-heavy crude against 86% in FY13 and 73% in FY12. Product mix was 84% distillates against 83% in FY13 and 71% in FY12. Minor optimization is still underway which management believes would enhance VGO to diesel conversion and can lead to further GRM improvement. EOL's CP GRM has also moved in line QoQ with Singapore GRMs maintaining USD0.5/bbl premium. We believe EOL's operating performance has largely stabilized and going forward would be dependent on broader refining scenario.

Debt dollarization underway; Retail, CBM progress continues

EOL has converted additional USD340m through ECB/swaps with current dollarized debt of USD821m out of total USD2.27bn approved by RBI. Management expects interest cost to reduce by 4% from current 11-12% and plans to complete the dollarization program in next 2 years with USD1bn targeted by Oct-13. EOL is optimistic on the retail scenario with continued diesel price hikes and has started selling bulk diesel besides petrol and other non-controlled products. EOL has drilled 165 CBM wells in Raniganj and plans to drill total ~350 wells targeting 3mmcmd output from current 0.1mmcmd. EOL has spent INR16.2bn out of total INR35bn investment envisaged and has acquired mining lease. Management has cited working capital financing to be the reason behind export securitization with China.

Cutting FY14 estimates due to FX volatility, Retain BUY with INR99/sh target price

We remain positive on the company as its core capex cycle is largely over and improvement in cash flows would help lower debt going forward which we believe remains the primary driver for the stock. Refinancing of rupee debt with dollar debt would be a natural hedge against adverse FX movement while interest burden is likely to ease. We however cut our FY14e EPS due to a volatile FX scenario and higher finance charges in 1Q though we maintain our FY14e EBITDA and FY15e EPS estimates. We maintain our BUY on EOL with a target price of INR99/sh.

Source : Equity Bulls

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