July 2013
Essar Energy Plc, an India-focused energy company with assets in the existing power and oil and gas businesses, may be ready to go to its own party, after all. Headquartered in Port Louis, Mauritius, and a subsidiary of Essar Group, the firm has started witnessing a turnaround with improved earnings in the financial year 2012-13.
The London Stock Exchange-listed, FTSE 250 Index-constituent Essar Energy's earnings were $1.3 bn at current prices before interest, tax, depreciation and amortisation, up from under $500 mn in the previous 15 months, whereas revenues were up just a quarter. The improvement was due to rising refining margins at its two main assets, oil refineries at Vadinar in India and Stanlow in the UK.
Naresh Nayyar, Essar Energy's Chief Executive Officer, said, “The recently completed projects in our refining and power businesses are now delivering good results. The much higher margins seen at our flagship Vadinar refinery reflects the benefit of investment in increased complexity and capacity.” The company's Stanlow refinery has achieved improved margins through implementing its '100-day plan'.
“Our focus now is on completing our remaining projects, continue optimising our operations, reduce our financing costs and to reduce our net debt. We are making good progress on these fronts and continue to be encouraged by the strong energy market dynamics in India,” said Nayyar. While Essar has started to shape up operationally, it has started delivering financially. The depreciating rupee value against dollar is also helping the company to attain stability and refinancing its rupee debt into dollar.
Refinancing debt
The Anglo-Indian power and refining firm has a gross debt is $6.9 billion and net debt is $6.7 billion. According to Essar Energy CFO Deepak Maheshwari, the dollar debt of this is $2.1 billion and rupee debt is $4.7 billion. Average maturity of rupee debt is 6-7 years and for dollar debt is 10 years, door-to door. Rupee interest rate is between 10-12 per cent per annum and dollar interest rate is Libor plus 400-500 basis points. Since, the volume of rupee debt is high, the group has planned to refinance its dollar debt. Essar Power, a sister concern, debt is $ 3 billion, which is almost entirely in Indian rupees. “Unlike Essar Oil, we can't raise dollars to refinance rupee loan,” said Maheshwari.
The group has recently completed its corporate debt restructuring (CDR) to expedite the refinancing process. Typically foreign banks or lenders stay away from CDR companies. “Now that we are out of CDR, the immediate thing is that we will refinance our rupee loans through ECB and other routes. We already have approval from Reserve Bank of India for $2.27 billion for ECB which we will use to replace our rupee debt,” says L K Gupta, Managing Director and CEO of Essar Oil. Interestingly, the rupee depreciation came as an additional advantage for the group. Maheshwari said: “A depreciating rupee will lower the overall debt when converted to dollar. Also, operational expenditure and interest cost per barrel fall as the rupee depreciates. Hence, rupee depreciation is positive for the oil company.”
So far the company has converted $ 481 million. It has signed an MoU with China Development Bank and PetroChina. “We are in discussion and should be able to close it in the next few months,” said Nayyar. Essar Energy is in discussions with domestic and international banks to dollarise its debt and intends to complete the process by end of the year.
Analysts say
The key near-term catalyst for Essar Energy is the potential refinancing of a further $3.5 bn of rupee-denominated debt at Essar Oil. Bank of America Merrill Lynch forecasts up to 40 per cent upside to earnings as the company accesses a number of potential options and management reiterated confidence in the refinance at the FY13 announcement. On the power side, the company has issued 10 per cent of the planned $1 bn domestic bond, which should remove liquidity concerns in the Power business (plus a small interest cost saving). Essar Energy has announced the full exit of its $2.1 bn CDR (a covenant heavy debt facility used to finance the Vadinar upgrade) earlier this year.
According to research agencies, power bond should also significantly reduce liquidity concerns. Given the delays to Mahan and uncertainly on the potential for pass-through of Indonesian taxes & water issues at Salaya, refinancing of the power debt would significantly reduce the liquidity concerns for this business.
However, some of the research agencies such as Deutsche Bank Markets Research provide a different outlook for the company. “The improved results reflected high margins achieved from its Indian and UK refineries, although a difficult performance from its power business,” says Deutsche Bank in its latest report. Essar reported a strong increase in profits from its Indian and UK refining businesses, with EBITDA at its Indian refining business increasing from $234 mn to $824 mn, and EBITDA at its UK refining business increasing from $13 mn to $317 mn. The company benefited from the completion of the upgrade of capacity and complexity at its Indian refinery and from margin enhancement measures at its UK refinery. Essar's refining activities were also helped by a very strong market backdrop in the UK and India, with benchmark refining margins at multi-year highs. “We are concerned that this may not be sustainable, and forecast lower profits for the refining businesses in FY2014,” the report says.
Deutsche foresees a challenging backdrop as the power business reported broadly flat EBITDA, although higher depreciation and finance costs pushed the business into a pre tax loss, with PBT decreasing from a $145 mn profit to a $29 mn loss. The business suffered from low load factors at its Salaya plant, due to low water availability and continued difficulties in coal sourcing for its Mahan plant. Essar said it would slow down the construction process for its Tori projects because of lack of fuel availability. “Although there have been some signs of political progress in resolving some of the issues facing the Indian power sector, the outlook remains very challenging in our view,” the research analysis infers.
Result highlights for year ended 31 March 2013
- Group revenue in FY2013 of $27.3bn; (15 mths FY2012: $22.0bn), up 24 per cent, driven by higher refining volumes at R&M India (Vadinar) and a full 12 months contribution from R&M UK (Stanlow)
- Group CP EBITDA in FY2013 of $1,335.5mn (15 mths FY2012: $484.5mn), up 176 per cent mainly due to increased margins and throughput at the Vadinar refinery, improved margins at the Stanlow refinery and increased throughput at Stanlow due to a full 12 months contribution
- CP profit before tax of $367.7mn (15 mths FY2012: loss of $103.6mn) as higher CP EBITDA was offset by increased interest and depreciation costs as projects moved into operations
- Loss before tax of $163.2mn (15 mths FY2012: loss of $1,147.7mn), as higher Operational EBITDA was offset by higher interest and depreciation costs as projects moved into operations
