Buy Essar Oil - Operating nos. marginally above UBS estimates

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UBS Investment Research
Essar Oil
O perating nos. marginally above UBSe
􀂄 Event: Q1FY12 results - bottom line boosted by tax credit
Essar oil reported net profit of Rs4.7bn for Q1FY12 as compared to a loss of
Rs700m in Q1FY11 and profit of Rs3.2bn in Q4FY11. PAT was higher than our
estimate due to lower depreciation and a MAT credit of Rs2.6bn. Other income at
Rs470m increased 74% QoQ. The company processed 3.6mt of crude in Q1FY12
in line with previous quarters.
􀂄 Clean GRM was US$4.2/bbl vs. US$5.3 in Q4FY11
The clean GRM of US$4.2/bbl (excl. sales tax benefit of $3.2/bbl) in Q1FY12 is
based on average prices in the month of June as per the management. Accounting
GRM for Q1FY12 was US$10/bbl vs. 9.5/bbl in the previous quarter. We believe
this figure includes non-operating items such as inventory gains/losses,
hedging/forex income and other income. We believe finance charges were lower
primarily due to interest earnings on delayed payments which could be reversed.
We need more clarity on this.
􀂄 Refinery expansion by September’11
Refinery expansion is on schedule to be completed by September 2011. We expect
higher refinery throughput and GRMs to be reflected by Q4FY12. The expansion
is 92% complete. There will be a 35 days shutdown from 18th Sept’11. Out of the
total cost of refinery expansion of Rs83bn, Rs75bn has already been incurred.
􀂄 Valuation: Maintain Buy with a price target of Rs175
We value the stock on a sum-of-the-parts basis: refinery, retail and upstream at
Rs140, Rs17/sh and Rs18 per share, resp. The stock has declined 1.8% over 6MTD
􀁑 Essar Oil
Essar Oil is a part of Essar Holdings Limited, a subsidiary of Essar Global
Limited. It operates a 14mtpa refinery on the west coast of India and plans to
increase refining capacity to 18mtpa by March 2011 and to 36mtpa by March
2013. The company's assets include developmental rights in proven exploration
blocks, and it has over 1,200 retail outlets across India with plans to expand to
3,000 outlets.
􀁑 Statement of Risk
Refining margins and execution of the refinery upgrade are key business risks
for Essar at this stage. Progress on E&P can provide upside.