Billionaire Ruias Stall Refinery Plan for Debt: Corporate India

Essar oil CEO Lalit Kumar Gupta
Lalit Kumar Gupta, chief executive officer of Essar Oil Ltd. Photographer: Dhiraj Singh/Bloomberg

Essar Oil Ltd., the Indian refiner controlled by the billionaire Ruia brothers, will freeze expansion plans in a bid to cut costs and debt.

The company wants to reduce liabilities to twice its net worth, a measure of financial leverage, from eight times, in the next two years, Chief Executive Officer Lalit Kumar Gupta said in an interview. Essar Oil has total debt of 165 billion rupees ($3 billion) and a net worth of about 20 billion rupees, he said. The Mumbai-based refiner also has to pay about 61.7 billion rupees of sales tax in three years after losing a case against the Gujarat state government to defer the levies.

“There was a plan to expand our refinery further but we are now completely focused to first generate money from our refinery and correct our leveraging,” Gupta, 52 said in New Delhi. “Two good years and we should be able to correct our leverage. Only once that happens, we have to at some point of time consider our plans further.”

Essar Oil, founded by Shashi, 68, and Ravi Ruia, is seeking to build on its first profit in five quarters after an expansion enabled it to process a wider variety of crude helping double refining margin. Turning cheaper oil from countries such as Colombia into fuels will help it generate more than $800 million of net cash annually, which will be used to cut debt. The company may also raise $1.5 billion in dollar obligations to refinance more expensive rupee loans.

Essar plans to raise its annual refining capacity to 36 million tons, Essar Global Ltd. Chief Executive Officer Prashant Ruia said in June last year, without providing a timeline, after doubling it to 20 million metric tons this year.

‘Silver Lining’

“They have to reduce their debt and leverage, or else banks will not let them expand,” Deven Choksey, managing director at K.R. Choksey Shares & Securities Pvt. in Mumbai, said Dec. 14. “Demand for fuels in India is a silver lining for Essar as they can sell oil products here. Improving their finances is the only way they will be able to build up confidence among investors.”

The Essar group, which started operations in 1969 by building a barrier to reduce wave intensity in Chennai port, is revamping $4.8 billion of debt held by its units including Essar Oil and Essar Steel Ltd. That has helped drive the biggest rally in Essar Oil’s parent Essar Energy Plc’s convertible bonds since they were sold two years ago.

The 4.25 percent notes due 2016 surged 18 percent this quarter, reducing the yield by 510 basis points to 15.69 percent, according to data compiled by Bloomberg.

‘Double Impact’

Essar Oil has risen 36 percent this year, compared with a 25 percent gain in the benchmark Sensitive Index. The shares fell 0.6 percent to 68.35 rupees at 10:53 a.m. in Mumbai. Essar Energy, which also controls the group’s power plants and coal mines, has slumped 30 percent in London trading this year.

“As we start generating cash from our refinery, it has a double impact,” Gupta said. “It increases our net worth and decreases our debt. Our target is to get the debt to somewhere around two times our net worth. That’s a healthy debt to equity ratio.”

Essar Oil reported net income of 1.1 billion rupees in the three months ended Sept. 30, the first quarterly profit since the period ended June 2011. It earned $7.86 for every barrel of crude it turned in to fuels in the quarter, compared with $5.07 a year earlier, according to a presentation to analysts posted on its website.

Heavy Crude

“Essar Oil’s refinery benefits from being a large-scale complex refinery, which gains from improving light-heavy crude spreads,” said Niraj Mansingka, a Mumbai-based analyst with Edelweiss Securities Ltd., who advises investors to buy Essar Oil shares. “Incrementally, margins will also improve as local sales of products increases. This will help them improve cash generation and lower its debt.”

Refineries such as Essar’s and Reliance Industries Ltd.’s have the capability to process heavier and high-sulfur crude, which are typically cheaper than lighter varieties.

The refiner is increasing fuel sales to Indian state-run marketing companies as local demand for oil products including diesel increases. It sold 64 percent of the fuels it produced in the quarter ended September to government-controlled companies including Bharat Petroleum Corp., compared with 51 percent a year earlier, according to the presentation.

Exports including gasoline and fuel oil dropped to 30 percent from 42 percent, the company said.

“Exports will decline over a period as the demand goes up in India,” Gupta said. “Selling in India definitely helps our bottom line because we save on some freight costs.”

Overseas Loans

Diesel consumption in India rose to 5.7 million tons in October from 4.9 million tons in September, according to oil ministry data. Gasoline use climbed to 1.3 million tons, the most since June. India is Asia’s second-biggest energy consumer, according to BP Plc data.

Essar Oil, rated BBB+, the lowest investment grade by the local unit of Fitch Ratings, generated 12.4 billion rupees of cash from operations in the year ended March 31, 35 percent less than the previous year, according to data compiled by Bloomberg.

The company on Oct. 9 said it may raise as much as $1.5 billion in overseas loans after it received approval from India’s central bank.

Essar Oil last year set aside 40.2 billion rupees as a “prudent measure” after the Supreme Court ordered it to pay sales tax to the government of Gujarat, where the company’s refinery is located. The court asked Essar Oil to pay the dues with a 10 percent interest in eight installments, one every four months, starting January 2013.

The top court on Jan. 17 said the company isn’t entitled to a state government incentive to defer payment of sales tax after missing the Aug. 15, 2003 deadline to start the refinery.

“We have had the setback of sales tax,” Gupta said. “As of now, we are focused not to do anything beyond running our refinery the way it is.”

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