ESSAR OIL Superior operations achieved; deleveraging awaited:: Edel

Essar Oil (ESOIL) reported Q3FY13 profit of INR320mn, lower than our
INR1030mn estimate due to higher interest cost and forex losses.
However, operationally the performance was superior. This was the first
quarter reflecting full benefits of the expanded complex refinery. While
the refinery operated at 102.8% utilisation (5.14 mmt), clean GRMs rose
to USD9.75/bbl reflecting the rise in complexity to 11.8. ESOIL used 84%
heavy and ultra-heavy crude and produced 85% light and middle
distillates. Going forward, reduction in debt and lower financing costs via
raising ECB will be key. Maintain ‘BUY’ with a target price of INR101

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Higher petcoke, lower naphtha boost clean GRMs to USD9.75/bbl
While Essar Oil’s book GRMs were USD8.83/bbl (estimate USD9/bbl), clean GRMs were
USD9.75/bbl, the difference being inventory and hedging losses. The refinery used 67%
ultra-heavy and 17% heavy crude with an average API of 27.1. While the light-heavy
spread widened in Q3FY13 led by lower fuel-oil demand, the refinery also capitalised
on higher coking margins through conversion of fuel oil to petcoke. No downstream
petrochemicals integration also means ESOIL has a lower naphtha yield than other
complex refiners. The coal-based captive power plant has been fully synchronised in
November 2012 and the company expects a saving of at least USD1/bbl in margins.
Opex at USD2.5/bbl; rising financing expenses continue to hurt
Interest expense at INR8.8bn and forex loss at INR3.45bn were higher (estimate
INR6bn and INR2bn) leading to lower PAT. With high leverage (~8-9x) and funding costs
(~11%), interest expense was ~80% of EBITDA in past two quarters. Following CDR exit,
ESOIL has received RBI’s nod to raise USD2.27bn via ECB which should improve
profitability. The company has paid the first installment of the sales tax liability.
Outlook and valuations: Refining margins to remain high; ‘BUY’
We are positive on refining margins as capacity closures will offset global additions
leading to CY12-14E net addition of 1.5mbpd versus demand growth of 2.4mbpd and
improvement in global utilisation from 81.2% in CY11 to 82.6% in CY14. Lower fuel oil
demand and wider light-heavy spreads is also a positive. We value refining at 6x
EV/EBIDTA and maintain ‘BUY/Sector Outperformer’ with a Mar’13 target of INR101.