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Essar Oil’s Q1 FY12 results were better than expectations on the topline & bottomline fronts due to a combination of higher product prices, lower interest expense & recognition of MAT credit.
We maintain our FY12E target price of Rs 168, which translates into an upside of 31%.
The refinery expansion project has achieved an overall completion of 92%. The expanded refinery of 18 MMTPA will achieve mechanical completion during Q3 CY11. The Delayed Coker Unit is expected to achieve mechanical completion during Q4 CY11. The refinery will be taking a 35-day shutdown from Sept 18 onwards for revamp & tie-in of the units and routine maintenance. There would be no production from the refinery during this period. The company is trying to build up inventories to service its clients during this period. The refinery optimization project, which envisages further expansion of refining capacity to 20 MMTPA, has achieved completion of 56% and is expected to complete by Sept 2012. The management has indicated that a complete refinery shutdown won’t be required prior to using the expanded capacity.
On the E&P front, the company has conveyed that some clearances for the Raniganj CBM project haven’t been given yet. Post obtaining the necessary approvals, commercial sales of CBM gas would commence. Currently, production is being kept at low levels of 33,000 scmd. The company will drill 500 wells throughout the life of the field and expects to convert the best estimate resource of 792 bcf to 2P/2C reserves. The company has already entered into a long term contract with Matix Fertilizers for 2.8 mmscmd for 20 yrs. The company has also tied up with local customers from the Durgapur Industrial Estate for offtake of gas.
We assume long term Brent crude price of $95/bbl and Singapore GRM of $6.5/bbl going forward. We estimate core GRM of $6.4/bbl and $7.4/bbl in FY12 & FY13 respectively. We estimate sales tax benefit to add $2.5/bbl & $2.3/bbl to the GRM during FY12 & FY13. Hence, we expect the company to earn gross GRM of $9/bbl & $9.7/bbl during FY12 & FY13. We estimate the refinery expansion to result in the company earning a premium to the benchmark Singapore GRM.
We forecast net sales of Rs 513,804.9 mn and Rs 602,690.5 mn in FY12 and FY13 respectively. We expect EBITDA to double from Rs 27,800 mn in FY11 to Rs 56,084.4 mn in FY13. We estimate PAT of Rs 11,378.6 mn and Rs 24,217.2 mn in FY12 and FY13 respectively. We expect EPS to jump from Rs 4.8 in FY11 to Rs 8.3 in FY12 and Rs 17.7 in FY13. Post expansion, we see net debt/equity falling from 1.7 in FY11 to 1.3 in FY13. We expect free cash flow to turn positive in FY13 at Rs 2,385.6 mn buoyed by strong operating cash flow of Rs 21,604.9 mn.
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