The Essar Oil scrip has surged 30 per cent in the past five trading sessions, outperforming the S&P BSE Sensex, which has rallied three per cent. News reports surrounding a possible stake sale by promoters to Russian oil and gas major Rosneft is a key reason behind this rally. The company’s plan to scale up its retail fuel outlets is another. Even as the management remains non-committal on the former, analysts are not ruling out the possibility of talks being held. Promoters are reportedly looking to sell a 49 per cent stake in Essar Oil to Rosneft for Rs 10,500 crore. The stock rallied on the hope that on completion of this deal, Essar Oil's debt burden (Rs 25,000 crore) will abate. However, analysts believe Essar Oil's promoters will retain a large part of the deal proceeds and, hence, Essar Oil's balance sheet will continue to be stressed. It is not yet clear whether promoters will end up selling their existing holding or Essar Oil will issue fresh shares or a mix of both. In case of the latter two routes, there could a reduction in debt of Essar Oil. The Essar Oil management has been looking at various monetisation options for their stake in the company, for sometime now.
It had tried to de-list Essar Oil in June 2014 but was unsuccessful due to muted response from minority shareholders and a revision in de-listing norms. After the rally, the company/promoters are likely to receive a better price for their stake now, believe analysts. Interestingly, Essar Oil is the only viable refining and marketing company for foreign companies looking to enter India. This is because most other players have government ownership and other private players such as Reliance Industries are well funded. Essar Oil plans to increase its fuel retail outlets from 1,500 to 5,000. The expansion will make the company the largest private fuel retailer in India and could push its market share from one-to-two per cent (versus 0.5 per cent for RIL) to around 10 per cent. Public sector oil marketing companies together have about 50,000 fuel retail outlets nationwide at present, and dominate the market. While Essar Oil's gross refining margins (GRMs) are likely to remain strong, higher interest costs will eat away a large part of these gains. “Our analysis suggests that even the level of $9.5 a barrel will be barely enough to report $3-a-barrel of net profit (average profit after tax over the past 10 quarters at negative $0.1 a barrel). In the past six quarters, we have seen Ebitda/barrel consistently fall short of the depreciation and interest burden when GRM has been less than $7.5; while the negotiations to reduce the interest burden are encouraging, we remain concerned about near-term ability of Essar to report material earnings upsides", writes Probal Sen of IDFC Securities in a recent report on the company. The stock currently trades at 4.1 times FY16 estimated book value and seems to adequately capture the positives. Due to lack of earnings triggers, high debt and corporate governance issues, most analysts remain bearish on the scrip.