June 25, 2013
Essar Energy may be ready to go to its own party, after all. The Anglo-Indian power and refining group has leaked a lot of value since its listing in London three years ago: its shares have slumped 70 per cent. There are two reasons for this. Essar turned out to be a slower turnaround story than expected. It is also a complex company with operations between India and the UK, high debt, family control and reporting in dollars. That complexity remains. But as yesterday's full-year results showed, the turnaround has moved up a gear.
The best evidence for this is the improvement in Essar's underlying performance in the year to the end of March. Earnings at current prices before interest, tax, depreciation and amortisation were $1.3bn from under $500m in the previous 15 months, whereas revenues were up just a quarter. The improvement is due to something rare in the business - rising refining margins at its two main assets, oil refineries at Vadinar in India and Stanlow in the UK.
So, operationally, Essar is starting to shape up. Financially, it is a work in progress. Its net debt of nearly $7bn is three times its equity and five times ebitda. Essar has a target of cutting the debt/ebitda ratio to 2.5 times within two years. This looks achievable given that its capital expenditure has peaked - it was just $1.2bn last year against $2.7bn the year before - and Essar looks poised to generate free cash flow on the back of strong refining performance.
Essar has a way to go, however, to convince investors that its turnaround is real. It faces several regulatory and bureaucratic obstacles in India, and it has a recent history of under-delivering. Of course, this may well mean that the progress to date is not priced in to its shares, which are down 17 per cent this month alone. It can be tough for companies whose original investment case disappears to build another one. Essar might just have the foundations to do so.
