Technicals -Rolta, Essar Oil, SRF, Torrent Pharma, NMDC, HIL, IDFC :: Business Line

Essar Oil- An unconventional opportunity :: JPMorgan

We assume coverage of Essar Oil with a Neutral rating and a Sep-14 PT of Rs55
from a Not Rated designation (OW rating and Rs160 PT prior to NR designation)
– a highly leveraged refining company with unconventional gas assets. The shares
have underperformed by 28% and 34% in absolute terms and relative to its local
market this year, reflecting concerns around debt management. However, Essar
Oil’s recently upgraded refinery provides better refining margins than most
domestic peers, with continued domestic diesel reform providing some
profitability upside. The company’s upstream asset, Raniganj, is now poised to
begin production with possible natural gas price reform also providing good cash
generation to manage its debt burden. While ESOIL gearing levels remain high
(c.424% in FY16E) despite converting costly INR debt to cheaper US$ loans, we
see risk-reward as fairly well balanced as we approach FY15.
 Sustainable refining margins from upgrading: With Essar Oil’s upgraded
refinery, with its higher complexity and optimization (using natural gas for
refinery power supply) providing more sustainable refining margins relative to
domestic peers despite our expectation of a broadly flat refining margin
environment in the medium term.
 Some upstream bias, worth c52% of value: Small volumes have commenced
from Raniganj, a coal bed methane project, with output expected to rise toward
a peak plateau of 3mmscmd from FY15. Overall we value all of Essar Oil’s
unconventional assets at Rs29/share, 52% of our total value.
 De-leveraging from debt conversion and operational delivery: Debt levels
remain elevated, with interest costs almost as high as EBITDA. While the
company is bringing interest costs down by converting INR debt to USD
(estimated saving of $60mn for every $1bn converted), gearing levels are likely
to remain high in the medium term.
 Valuation and Risks: Our PT is based on SOTP – we use an 11x P/E multiple
(at a discount to regional peers to account for continuing high leverage and
lower profitability, and value the Raniganj asset on DCF; Rajmahal on resource
base). Downside risks are lower refining margins, upstream execution and
persistently higher interest costs. Upside risks improving debt management,
higher natural gas prices and faster-than-expected diesel price reform.

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

Essar Oil (Rs 76.8): BUY ::Business Line

Sizzling Stocks: Multi Commodity Exchange of India and Essar Oil :: Business Line

52-WEEK FLOP: ESSAR OIL ::Business Line

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ESSAR OIL Reverses sales tax deferral benefit :: Edelweiss

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Essar Oil (ESOIL) reported Q3FY12 EBITDA of INR4.8bn and loss of
INR39.8bn versus estimates of INR(231)mn and INR(3.2)bn, respectively.
Operating GRM at USD2.8/bbl was down USD2.3/bbl QoQ on weak
gasoline margins and fall in light-heavy spreads. Adjusting for INR2.5bn
forex loss, EBITDA is much higher due to inventory gains booked in gross
margins. It reversed INR40bn of sales tax benefit booked so far. ESOIL
expects to commission the entire 18 mmtpa refinery by March 2012, post
which complexity will rise to 11.8, close to that of RIL. Maintain ‘BUY’.
Lower operational GRMs at USD2.8/bbl; throughput at 2.81 mmt
ESOIL’s operational GRMs (excl. sales tax benefits) of USD2.8/bbl (down USD2.3/bbl
QoQ) was lower than USD4.2/bbl estimate due to weak gasoline margins and fall in
light-heavy spreads. Including sales tax deferral benefit, GRMs were USD6.1/bbl
(USD7.2/bbl QoQ). Refining throughput at 2.81 mmt was down 7.3% QoQ and 24.7%
YoY due to the shutdown in refinery for 22 days.
Reversal of sales tax benefit hurts, but refinery expansion on track
Post the Supreme Court ruling against sales tax deferral, ESOIL reversed INR40.15bn of
sales tax benefit it had accounted for over the past three years. The company has filed
a review petition with SC for the same, and is in discussion with Gujarat govt. to finalize
the repayment schedule. To boost its net worth, ESOIL is proposing to its parent Essar
Energy conversion of INR14bn of FCCBs due in 2028 into equity (conversion price at
INR138 and INR153 for two tranches). It also plans to raise further equity and reduce
promoter holding in the process to the SEBI mandated 75% by June 2013.
The refinery expansion from 14 mmtpa to 18 mmtpa with Nelson Complexity of 11.8
will be operational by March 2012. Post this, share of ultra-heavy and heavy crude will
rise from 75% to 81% while share of heavy distillates will fall from 25% to 16%.
Outlook and valuations: GRMs to improve in FY13; maintain ‘BUY’
We value ESOIL using 5.5x EV/EBIDTA for its refining business and INR44/share for its
CBM business. Key triggers are the refinery ramp up, scale up of CBM production and
gas pricing, and exiting from CDR, post which the company can raise foreign debt and
cut cost of debt from 11% currently. Maintain ‘BUY’ with a SOTP of INR101/share

Kotak Sec:: PDF link: DLF, Essar Oil, Tata Power, IDFC, RCom, Shriram Transport Finance, Reliance Capital, Eros, MTNL, Puravankara, JSW steel, Sun TV, Tata Steel, IndusInd Bank,

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http://www.kotaksecurities.com/pdf/indiadaily/indiadaily13022012.pdf


Daily Alerts
Results
DLF: Right course but still in rough waters
Oil India: Country cousin steals a march
Tata Power: Coal production ramps up, low cost coal gives Mundra hope
IDFC: Growth strong, core in line
Reliance Communications: Weak results but do they matter?
Shriram Transport: A flat quarter
Reliance Capital: A mixed quarter
Eros International: Growing up
MTNL: Operational strife continues
Puravankara Projects: In-line results, poor sales


Results, Change in Reco
JSW Steel: Reports consolidated loss; stock expensive
Sun TV Network: A rainy quarter; Sun hides behind the clouds
Change in Reco
Tata Steel: Negatives out of the way
IndusInd Bank: Limited risks to business; valuations cap returns in the near
term


Sector
Consumer products: Hale and hearty, for now
Economy
Economy: IIP growth likely to be near the bottom

Sizzling Stocks - Essar Oil , Sesa Goa:: Business Line

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Essar Oil (Rs 62.4)

Following the company's announcement of an increase in gas reserves and resources at its Raniganj CBM Block, the stock jumped 16.5 per cent on Tuesday. Holding these gains, the stock ended the previous week up 20 per cent. But the stock is currently testing key resistance at Rs 64. A decisive penetration of the resistance level will indicate that the stock will continue to be in a nascent short-term uptrend. In that case, the stock can trend higher and reach Rs 73 and then move to Rs 86 in the medium-term.

But failure to move above Rs 64 will pull the stock down to Rs 53, floor of the gap formed recently and then to Rs 45. A strong dive below Rs 45 will reinforce the stock's intermediate-term downtrend that has been in place since November 2010 peak of Rs 161 and drag the stock down to Rs 39. A strong jump above Rs 105 is required to alter the stock's downtrend.

Sesa Goa (Rs 213.7)

Sesa Goa advanced 12.8 per cent accompanied by good volume last week, after announcing its December quarter results. The stock has been on an intermediate-term downtrend from its April 2010 peak of Rs 494.

However, since its 52-week low of Rs 148 registered on December 20 last year, the stock has been on a short-term uptrend. This trend reversal was triggered by positive divergence in the daily moving average convergence divergence indicator and weekly relative strength index.

The stock is on the brink of testing its significant long-term resistance band between Rs 218 and Rs 230 in the upcoming weeks. A strong breakthrough of this resistance band will lift the stock higher to Rs 260 and Rs 290 in the medium-term. But the inability to move above Rs 230 can pull the stock down to Rs 190 and to Rs 170 in the medium-term. Subsequent support is at Rs 148.

Essar Oil - Sizeable impact of SC ruling against sales tax deferral; company update; Buy ::Edelweiss

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Essar Oil (ESOIL IN, INR 52, Buy)

The Supreme Court has set aside an earlier judgment of the Gujarat High Court which allowed Essar Oil to defer payment of sales tax to Gujarat government from its Vadinar refinery in the state. Gujarat govt. claimed that the refinery was set up after the incentive cut-off date. The deferment of sales tax payment bestowed NPV benefits to Essar, which it showed as a part of reported GRMs (~USD2.5/bbl). Post the SC decision, Essar might have to pay back the state INR63bn of sales tax deferred so far. This will lead to higher debt and we estimate a cut in SOTP by INR74bn (INR 52/share).

SC ruling against deferral of sales tax

The Gujarat govt. had come out with a Capital Investment Incentive Scheme, 1995-2000, encouraging investments in refineries, whereby it allowed companies to retain sales tax collected for the first 17 years of operations, and repay the same in six equal annual installments thereafter. Refineries benefited from the time value of money as no interest was paid due to the deferral. However, the state govt. contested that Essar’s Vadinar refinery was set up beyond the incentive date of August 2003 and hence, not eligible for a deferral. Essar countered, saying that the refinery commissioning was delayed due to reasons beyond its control.

As per Essar Oil’s claims, it was eligible for a total Sales Tax Deferral of INR91bn. NPV of savings as a result of this would have been ~ INR58bn. Till Dec 2011, Essar had availed Sales Tax Deferral of INR63bn (reported EBITDA on account of the same at INR42bn). While Essar may be filing a review petition, we are assuming that the recent SC judgment is final. Hence, we are factoring in the repayment of INR42bn plus our estimate of interest of INR 14 bn by ESOIL to Gujarat in FY13.

Outlook and Valuation: SOTP to fall by INR52/share to INR101

Absence of earnings from Sales Tax Deferral and higher interest expenses will lower FY13E EPS by INR8 to INR3.3. Assuming an upfront payment of INR56bn and lowering refining valuations to 5.5x EV/EBITDA on weaker outlook for refinery demand, our SOTP for Essar Oil would fall by INR52/sh to INR101/sh. At CMP INR52, Essar Oil is trading at a P/E of 15.8x FY13 EPS and EV/EBITDA of 7.8x FY13 EBITDA. Maintain ‘BUY’.

Essar Oil: Buy ::Business Line

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The 35 per cent decline in the price of the Essar Oil stock over the past six months presents a good buying opportunity for investors with a long-term perspective. While September quarter results of the refining major have been marred by forex losses due to the steep depreciation in the rupee, its core performance has been healthy. The company reported current price gross refining margin (GRM), excluding sales tax benefit, of $5.07 a barrel, compared with $4.20 in the June quarter.

GRM is the difference between the price of a refiner's product basket and its cost of crude oil. Essar Oil's ongoing refinery expansion programme is in an advanced stage of progress. Phase-I of the expansion, expected to be completed in December 2011, should significantly enhance the company's refining capacity and complexity, giving a fillip to its GRM.

Besides, the company is poised to step up commercial production in its coal bed methane (CBM) block in Raniganj, West Bengal. At its current price of Rs 85, the Essar Oil stock trades at around 13 times its trailing 12 month earnings, lower than its historical levels.

EXPANSION TO BENEFIT

Majority of the works for Phase I expansion at the company's Vadinar refinery have been completed, and the balance is expected to be wrapped up by the end of the calendar. With this, output of the refinery is expected to go up from around 14 mmtpa currently to 18 mmtpa in the March quarter. The expansion would also increase the refinery's complexity from 6.1 currently to 11.8, next only to that enjoyed by Reliance Industries. This is expected to give a boost to Essar Oil's ability to process heavy and ultra-heavy crude oil, which is cheaper than light crude. Post- expansion, almost 89 per cent of the company's crude basket would comprise of heavy and ultra-heavy crude, up from 72 per cent currently.

At the same time, the expansion would improve the company's distillate yield in favour of light and middle distillate products such as petrol and diesel. It would also improve the company's flexibility to produce petrochemical feedstock.

The combination of cheaper inputs, high-margin output and higher volumes should translate into a jump in the refinery's GRM, and aid sales and profit growth. In addition to the expansion programme, the refinery optimisation project is also under way. With almost 64 per cent progress achieved, this project is expected to be competed by September 2012 and would raise output to 20 mmtpa.

Essar Oil has indicated plans to increase capacity to 38 mmtpa in Phase II, depending on market conditions.

CBM COMMERCIAL PRODUCTION

Essar Oil's plans to commercialise gas production from its coal bed methane (CBM) block in Raniganj are also progressing well.

Current production in the block is around 22,000 scmd, and the company has started pipeline supply of the gas to end customers on test basis at an approved rate of $6.25 per mmbtu.

With environmental clearance received for Phase I of the project, drilling plan of 500 wells approved, and some sales contracts tied-up, the company is in the process of deploying resources to increase production in the block. Ramp-up of output and sales in the coming fiscal could provide a fresh trigger for the stock.

FINANCIALS

Thanks to a positive refining environment and high refinery utilisation levels (more than 140 per cent), Essar Oil's sales in fiscal 2011 grew by around 28 per cent to Rs 47,905 crore, while its profits rose 23 times to Rs 654 crore.

The good performance continued in the June 2011 quarter, with sales growing at 42 per cent, and the company posting a profit of Rs 469 crore (against a loss of Rs 70 crore in the year-ago period).

However, the company hit a roadblock in the recent September quarter with forex loss of Rs 407 crore and a planned 13-day shutdown in connection with the refinery expansion plan, contributing to the loss of Rs 166 crore.

Nevertheless, with core operations registering a good show, as reflected in the improvement in GRM, the recent travails may be temporary.

This, combined with impending expansion in capacity, should aid the company's prospects. Essar Oil's debt to equity is high at 2.16.

However, expected improvement in profitability and cash flows, post-expansion, should aid debt servicing. The company's improved financial position is reflected in its intent to expedite closure of the ongoing corporate debt restructuring programme (implemented in 2005) before March 2012.

The Essar Oil stock has had a chequered history on the bourses, with plans by the company to delist in 2007 later shelved.

Delisting rumours had again surfaced in 2009 (denied by the company) and resulted in a sharp run-up in prices.

Oil India – Uncertainty on subsidy ::RBS

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In the absence of any clear direction from the government, forecasting upstream subsidy
payments has become more difficult this year. We assume a steady improvement in net
realisation, but lower than our earlier forecasts. We lower our forecast EPS by 8-11% for FY12-14
and reduce TP to Rs1,390; maintain Hold.


Cautious view on subsidy sharing
The move by the Indian government (GOI) to increase FY11 upstream subsidy to 39% (as
against an earlier promise of 33%) has highlighted the absence of any clear cut formula for
subsidy sharing. There is more uncertainty this year given that reported under-recoveries will be
lower, primarily due to GOI cutting taxes. We model our subsidy payments assuming: upstream
companies will not benefit from the GOI duty cuts; and the exact subsidy-sharing ratios (35-40%)
have been derived by assuming some improvement in net oil realisation. In FY12F, the upstream
subsidy works out to 49% of reported under-recovery. Our guiding principle is that there are no
prospects for any sharp improvements in net realisations as long as GOI has to bear some
burden of the downstream under-recoveries.
Longer-term prospects linked to legacy assets
Oil India (OIL) has improved its production growth rate by using improved production and
exploration techniques in its legacy assets in North-East India. Going forward, we expect more of
the same. Exploration in the NELP blocks is yet to provide any significant discoveries and OIL
has as yet been unsuccessful in its objective of making any significant overseas acquisitions.
Hence OIL’s net cash balance (US$2.6bn) is rising and the contribution of cash in our SOTP
valuation is 35%.
Maintain Hold, TP Rs1390
Our new forecasts for net oil realisation over FY12-14F (US$59-62/bbl) have dropped, which
leads us to cut our FY12 and FY13 EPS forecasts by 7% and 11%. We maintain Hold but cut our
SOTP valuation for OIL from Rs1,460 to Rs1,390. While valuations for the stock remain
undemanding on our forecasts, there seem few prospects for an improvement in valuation until
there is clarity on OIL’s ability to benefit from any improvement in global oil prices.

Essar Oil: New projects to drive earnings growth; initiating with Buy:: Deutsche Bank,

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Commissioning of new projects to drive EPS CAGR of 51% over FY11-14E
We initiate coverage on Essar Oil (ESOIL) with a Buy rating and a target price of
INR130, implying upside potential of 33%. Our positive investment case is
premised on: 1) refinery capacity expansion by 29% to 18mmtpa in 3QFY12E, and
almost a doubling of complexity to 11.8 leading to higher refining margins; 2)
commercial production start-up from Raniganj CBM by 3QFY12E; and 3) a current
valuation of 4.6x FY13E EV/EBITDA, which is a 20% discount to regional peers.


Major capex completed; time to monetize investments
ESOIL is aiming to expand its refining capacity by 40%, to 20mmtpa, by 2HFY13,
and simultaneously upgrade its refinery from a Nelson Complexity Index (NCI) of
6.1 to 11.8, with capex of US$2.2bn. Compared with FY11, we expect this to lead
to a 25% higher throughput and a 65% higher gross refining margin (including
sales tax benefit) of US$11.4/bbl in  FY13. We also expect ESOIL to start
commercial production of coal bed methane (CBM) gas from its Raniganj block in
2HFY12, achieving peak production of 3.5mmscmd in FY14.
Refining margin improvement to drive EBITDA CAGR of 37% over FY11-14E
We estimate the expansion and upgradation of the refinery, and the start-up of
CBM production to drive an EBITDA CAGR of 37%, and an EPS CAGR of 51%
over FY11-14E. We expect strong cash flow generation (FY13E FCF yield of 10%)
to lead to a reduction in debt and leverage from FY13 onwards. We estimate net
debt/equity to fall below 1x in FY14, from 1.8x in FY11. However, if the global
economy worsens, leading to a fall in global refining margins, this may have a
significant adverse impact on ESOIL’s earnings and valuations - a US$1/bbl lower
GRM would reduce our FY13E EPS by 22% and our valuation by 20% (INR26/sh).
We have already seen the stock price correct  by  24%  in  the  last  two  months  on
fears of the global economic slowdown impacting ESOIL’s GRMs.
SOTP-based target price of INR130; worsening global economy is key risk
We value ESOIL at INR130/share on an SOTP-basis. We value the refining
business on 6x FY13E EV/EBITDA, and the E&P business on DCF with a 14.2%
WACC. Risks are: 1) a worsening global economy that could hurt refining demand
and margins; 2) project execution risks; and 3) policy vagaries.

UBS :: Essar Oil - Company update

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UBS Investment Research
Essar Oil
C ompany update
􀂄 Event: Company update
Essar’s stock has fallen 26% over the past 1.5 months and is now trading at FY13
P/E of 7.1x. The under performance vs. the market is mainly on account of investor
concerns on refinery expansion and execution. The company though, has been
guiding for timely upgrade by Dec ‘12 and stabilisation of operations by Mar ‘12.
We update our estimates post the release of annual report & a company meeting.
􀂄 Refinery upgrade on track
Based on our meeting we believe refinery expansion is on schedule – after the 35
day shutdown from mid Sept, the commissioning activities will begin. Essar
expects that the last piece of equipment to be commissioned will be the coker
drums that will be commissioned towards Dec’12. And we expect higher refinery
throughput and GRMs to be reflected by Mar’12. Further, the company believes
that the refinery will be debottlenecked to 20 MMTPA by Sept 2012 – though we
have conservatively incorporated debottlenecking in FY14.
􀂄 Lowering our EPS estimate
We lower our FY 12/13/14 EPS expectation by 8%/4%/7% to price in the risks in
the current high interest rate environment and to incorporate the higher (than our
expectations) net debt of FY11. At this point, we do not factor in the Ratna fields
or its associated capex in our numbers.
􀂄 Valuation: Maintain Buy; Lower price target to Rs160
We value the stock on a sum-of-the-parts basis: refinery, retail and upstream at
Rs123, Rs17/sh and Rs17 per share, resp.


􀁑 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.

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 - "Results above expectations" LKP

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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.

Essar Oil - Refining margins weaker; the much awaited upgrade may finally be around the corne:: Credit Suisse

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Essar Oil ------------------------------------------------------------------------ Maintain OUTPERFORM
Refining margins weaker; the much awaited upgrade may finally be around the corne


ESOIL reported 1Q FY12 EPS of Rs3.4, up 46% QoQ and 74%
ahead of our estimates. Adjusted for the one-time prior period
MAT credit of Rs1.7bn, PAT would have been in line.
● ESOIL reported ‘clean price’ GRM of $4.2/bbl, down $1.1 QoQ;
contrary to benchmarks. At the analyst meet, ESOIL indicated
‘book GRM’ (inclusive of inventory, hedging and other gains) of
c.$10/bbl was up $0.5/bbl QoQ, still behind benchmarks. While we
await details from the company, we suspect a worsening slate
(higher FO output) could have contributed to the miss.
● Higher inventory gains, other income (Rs870 mn on payables to
Iran), hedging gains (Rs800 mn) and lower interest costs (on
working capital) have helped earnings.
● After several deferrals, ESOIL now hopes to affect a 35-day
shutdown at the Vadinar refinery beginning 18 Sept to integrate the
upgrades; though the delayed coker is further deferred into Dec.
ESOIL estimates the upgrade can add $4-5/bbl to margins. ESOIL
trades at c.6x on FY13E. The upgrade can be a significant catalyst

Essar Oil F1Q12 –GRMs weaker, tax credit boosts bottom-line ::Morgan Stanley Research,

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Essar Oil
F1Q12 –GRMs weaker, tax
credit boosts bottom-line
Quick Comment: Essar Oil reported F1Q12 EBITDA of
Rs8.7bn (+117% YoY, -2% QoQ), which was 16% below
our estimate of Rs8.8bn due mainly to lower-than-
expected GRMs. However, reported PAT of Rs4.7bn
was in line with estimates as the company booked
Rs1.66bn in MAT tax credit related to prior years.
Adjusting for this, PAT was 33% below our forecast.
Lower-than-expected GRMs: Essar Oil reported
GRMs at US$7.4/bbl (incl. sales tax benefit), down 9%
QoQ, which were US$2/bbl below our expectation.
Adjusting for sales tax advantage of US$3.2/bbl, pure
GRMs stand at US$4.2/bbl, implying a negative spread
of US$4.4/bbl over Singapore complex. We believe that
a worsening product slate (higher Fuel Oil output) could
have contributed to weaker GRMs as heavy output
increased by 2-percentage point during the quarter.
Key takeaways from the analyst meeting:
Refinery Phase 1 expansion to 18MT is on track, and
mechanical completion is targeted in a phased-in
manner in C3Q11. However, commissioning of the
coker unit is deferred to Dec-11. Essar will shut its
refinery for 35 days during Sep-Oct to complete the
revamp and carry out the tie-in jobs for the expansion
units. Further optimization to 20MT is also on track with
completion target by Sep-2012.
Post expansion GRMs to be substantially higher
than current levels: Based on simulation results, Essar
Oil believes completion of the project upgrade can add
US$4-5/bbl to current GRMs.
Raniganj CBM Development on track; however no
clarity on Ratna PSC yet. Raniganj is producing
0.33mmscm, however, commercial production is
targeted in coming months post government approvals.
There is no clarity on the timeline of signing of Ratna
PSC as yet, as management is unsure when the
government will approve the signing of the Ratna PSC.

MRPL & Essar Oil - " Play the Refining Theme":: LKP

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A combination of high crude prices and sustained product demand is resulting in strong product spreads which has positioned pure refiners in a sweet spot. This is best manifested through a cursory glance at the benchmark Singapore GRM which is going strong at $ 8.8/bbl during the quarter-to-date. To put things in perspective, the Singapore GRM during Q1FY11 was just $ 4.1/bbl, which represents more than doubling of refining margins y-o-y. Refining margins have also risen sequentially from $ 7.5/bbl in Q4FY11 to $ 8.8/bbl during the quarter-to-date. Currently, Singapore GRM is ranging between $ 8-8.5/bbl, which is expected to result in very favorable economics for pure refiners.

Sector Dynamics

A sweeping glance through the oil sector reveals a host of issues that are dogging the sector as a whole and some company-specific issues which are acting as a drag on the respective stocks. The over-arching issue of the adhoc subsidy sharing mechanism is taking its toll on the PSU space. Crude prices of $ 110+/bbl threaten to complicate the scenario considerably. The recent move to arbitrarily increase the subsidy burden on the upstream sector to ~39% has severely impacted the stocks. With the finances of the PSU OMCs held hostage to grants by the Govt., it has become very difficult to estimate future performance.

On the other hand, falling output from the KG D6 block threatens to overturn the capacity utilization calculations of various gas pipeline operators which may result in adverse near term performance. The Cairn-Vedanta deal, which was announced 10 months ago, is proving to be a case of indecisiveness in policy-making at the highest levels with opposing pulls & pressures from all sides. The interim CAG audit report on KG D6, Rajasthan & PMT fields couldn’t have come at a worse time for a sector that is already battling a multitude of headwinds.

MRPL & Essar Oil best positioned

We believe that the refining space within the oil sector is best positioned for a take-off, aided by strong fundamentals and availability of companies which are expanding their capacities at the most opportune time to capitalize on the refining cycle. With the sword of under recoveries not hanging over them, we believe MRPL & Essar Oil offer the best bets to play the refining theme.

Valuation

We value MRPL using EV/EBITDA multiple of 6.25x on FY13E EBITDA and arrive at our price target of  Rs.115, which translates to a hefty upside of 58.7%. MRPL is our top pick to play the strong refining cycle.

We value Essar Oil using SOTP valuation. We value the refinery using 6.25x FY13E EV/EBITDA and the Mehsana and Raniganj blocks using DCF. We value the Ratna/R-series & Nigerian blocks using EV/boe multiple. We upgrade our rating on the stock to BUY with a target price of Rs.187, which translates into an upside of 59.3%.

Essar Oil (ESRO.BO; Summary Takeaways from Citi India Investor Conference – Day 3

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Essar Oil (ESRO.BO; Rs126.05; 2M)
 Takeaways from Mumbai – Essar Oil presented at our India Investor
Conference in Mumbai. Below are the key takeaways.
 Refinery expansion project on track – Essar’s refinery expansion project (14 to
18 MMTPA) is expected to be complete by 2Q/3QFY12E, with a shutdown of the
current units expected in Sep-end for maintenance and to tie-in the new units.
The mgmt expects this expansion cum upgrade project to add ~US$4-5/bbl to its
GRMs on account: of 1) greater use of heavier and cheaper crudes (complexity
to increase from 6.1 to 11.8), and 2) an enhanced product slate maximizing the
production of high-value products, such as diesel and gasoline.
 Refinery currently using LNG – With KG gas production not ramping up and
the Gov’t allocating domestic gas to priority customers (power, fertilizer, city gas),
Essar has been using imported LNG as a fuel in its refinery. While imported LNG
at US$11- 12/mmbtu is significantly more expensive than domestic gas, the
company stated that it is still economical vs. alternatives such as fuel oil.
 Raniganj CBM - Environmental clearances are expected shortly - Essar is
currently producing ~35,000 scmd of gas from its Raniganj CBM field, which is
being sold to industrial consumers. Mgmt expects environmental clearance for
the commencement of commercial production from the field to come in soon,
now that the West Bengal elections are over.
 Strong refining outlook – Essar expects refining margins to remain healthy, on
the back of strong diesel and gasoline demand. While margins in the last few
months have been boosted by the Japan crisis, going forward mgmt expects
strong product demand to keep margins firm.
 Expansion of fuel retail business contingent on Gov’t policy – Essar
currently has ~1,700 retail outlets, of which 1,381 are operational. With domestic
diesel prices still significantly below international prices, the company expects its
retail volumes to pick up only if 1) crude prices soften from current levels and/or
2) fuel prices are hiked or deregulated.
 Timely project execution remains key – Essar is currently executing two key
projects: refinery expansion and the Raniganj CBM project. The refinery
expansion project currently remains on track, and the company expects the
environmental clearance for commercial production of gas from the Raniganj field
to come in soon. We believe that 1) trends in regional refining margins and 2)
timely commissioning of new projects would be key determinants of earnings and
valuations going forward. Maintain Hold (2M).


Essar Oil
(ESRO.BO; Rs126.05; 2M)
Valuation
Our SOTP-based target price of Rs161 for EOL comprises: i) existing refinery (postexpansion
to 18 MMTPA) valued at Rs76/share based on 6.5x FY12E EV/EBITDA
and discounted back to Mar-11E; ii) value of E&P (Raniganj, Rajmahal & Ratna,
Rajmahal 25% risk-weighted) at Rs73/share; and iii) value of tax benefits (IT & sales
tax) at Rs13/share. Our target price is based on GRMs of US$10.0 in FY13E (incl.
sales tax benefits) after completion of the expansion project.
Risks
We rate Essar Oil Medium Risk, as diversified earnings from both refining and E&P
partly mitigate impacts of the global slowdown. Key downside risks to our target
price include: 1) Execution risks for refinery expansion projects, especially in the
light of significant delays in commissioning the existing refinery, 2) Refining margins
are immensely volatile owing to dependence on product demand and global
economic conditions; this exposes EOL's margins to global refining cycles, 3)
Government policy which could include private refiners within the subsidy-sharing
regime, 4) the Gujarat government is contesting EOL's sales tax benefit and the
matter is sub-judice in the Supreme Court, and 5) Execution of the PSC for the
Ratna & R-Series block has already faced considerable delay, further delays could
increase risks; besides there might be a risk to the assets which are in the process
of being transferred from EEPL, a group company, to EOL. Upside risks to our
target include: 1) Significant improvement in the global refining environment and
uptick in distillate demand, 2) Positive outcome of the sales tax-deferment case and
signing the Ratna PSC with the Gov't, and 3) Timely and cost-efficient
commissioning of the expanded capacity.