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Fully valued; execution key
ƒ Limited upside: valuations seem to factor in phase I expansion
ƒ Improving refining margins to benefit the oil business
ƒ Delay in monetisation of current E&P projects, a key concern
ƒ Downgrade to HOLD with a SoTP-based TP of GBP528.00
Downgrade to HOLD, from Buy
We downgrade Essar Energy (Essar) to
HOLD as we see limited upside potential
from our TP of GBP528.00, which already
factors in a timely completion of phase I
power projects within budget, phase I
refinery expansion (+4m tonnes per
annum), and timely monetisation of E&P
upside from Raniganj (commercial delays
seen) and Ratna oil fields (PSC not
signed yet).
Power: phase I priced in
We would wait for the timely completion of
Essar’s phase I power projects before
ascribing any value to phase II power
projects totalling 5.4GW. Essar completed the 380MW Vadinar phase I
expansion in October 2010. Management expects the forest
department’s clearances for captive mines for Essar’s Mahan (1,200
MW) and Tori (1,200) projects to come through shortly, and we are
assuming these plants will source coal from Coal India (COAL IN; Not
rated) until the captive mines start coal production. We continue to
assume 49% higher fuel costs for these plants as long as they source
coal from Coal India.
Refining: utilisation remains strong; project on track
2010 refining performance was on track, with GRM averaging slightly
below our estimate of USD4.5/bbl (excluding sales tax benefit) and
strong average utilisation of about 135%. Phase I expansion of the
Vadinar Refinery, from 14m tpa to 18m tpa, is on track, and we expect
startup in early 2H11. The increase in complexity from 6.1 to 11.8 would
help Essar process much heavier crude slate and divert negative margin
fuel oil into more profitable petcoke. However, the increasing reliance on
exports is a concern in an anticipated over-supplied global market. We
expect GRMs to expand to USD6.5/bbl for 2011 and USD8.7/bbl for
2012, ex-sales tax benefit of USD1.5/bbl.
Valuation – Looks fully priced
We have used SoTP to value Essar Energy at GBP528.00/share. We
value EV of Essar Power at GBP419/share using DCF (WACC 10.7%).
We value the refining business at GBP230/share, using a target 2012E
EV/EBITDA of 7x (mid-cycle valuation), E&P business at GBP73/share
(ex option value), Mombasa refinery at GBP2/share and net debt
GBP196/share. Key risks to TP: Power: coal linkage, forest clearance,
fuel cost escalation, lower spot power prices, project delays. Oil: signing
of Ratna oil PSC and any further delay in Phase I refinery expansion.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Fully valued; execution key
ƒ Limited upside: valuations seem to factor in phase I expansion
ƒ Improving refining margins to benefit the oil business
ƒ Delay in monetisation of current E&P projects, a key concern
ƒ Downgrade to HOLD with a SoTP-based TP of GBP528.00
Downgrade to HOLD, from Buy
We downgrade Essar Energy (Essar) to
HOLD as we see limited upside potential
from our TP of GBP528.00, which already
factors in a timely completion of phase I
power projects within budget, phase I
refinery expansion (+4m tonnes per
annum), and timely monetisation of E&P
upside from Raniganj (commercial delays
seen) and Ratna oil fields (PSC not
signed yet).
Power: phase I priced in
We would wait for the timely completion of
Essar’s phase I power projects before
ascribing any value to phase II power
projects totalling 5.4GW. Essar completed the 380MW Vadinar phase I
expansion in October 2010. Management expects the forest
department’s clearances for captive mines for Essar’s Mahan (1,200
MW) and Tori (1,200) projects to come through shortly, and we are
assuming these plants will source coal from Coal India (COAL IN; Not
rated) until the captive mines start coal production. We continue to
assume 49% higher fuel costs for these plants as long as they source
coal from Coal India.
Refining: utilisation remains strong; project on track
2010 refining performance was on track, with GRM averaging slightly
below our estimate of USD4.5/bbl (excluding sales tax benefit) and
strong average utilisation of about 135%. Phase I expansion of the
Vadinar Refinery, from 14m tpa to 18m tpa, is on track, and we expect
startup in early 2H11. The increase in complexity from 6.1 to 11.8 would
help Essar process much heavier crude slate and divert negative margin
fuel oil into more profitable petcoke. However, the increasing reliance on
exports is a concern in an anticipated over-supplied global market. We
expect GRMs to expand to USD6.5/bbl for 2011 and USD8.7/bbl for
2012, ex-sales tax benefit of USD1.5/bbl.
Valuation – Looks fully priced
We have used SoTP to value Essar Energy at GBP528.00/share. We
value EV of Essar Power at GBP419/share using DCF (WACC 10.7%).
We value the refining business at GBP230/share, using a target 2012E
EV/EBITDA of 7x (mid-cycle valuation), E&P business at GBP73/share
(ex option value), Mombasa refinery at GBP2/share and net debt
GBP196/share. Key risks to TP: Power: coal linkage, forest clearance,
fuel cost escalation, lower spot power prices, project delays. Oil: signing
of Ratna oil PSC and any further delay in Phase I refinery expansion.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process
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