Analysts want Essar Oil to rejig loans, not swap

Essar Oil, owned by the Ruias, would have to restructure its massive debt of Rs 22,000 crore, as interest costs are shaving off half its earnings (before interest, tax and depreciation), analysts say, adding the swapping of local loans with foreign ones wouldn't help meet profitability targets.

To swap its rupee loans, the company has already raised about $850 million in foreign debt this year. It has also secured the Reserve Bank of India's permission to raise another $1.3 billion of foreign debt.

"We estimate for every $100 million of additional debt refinancing, the interest cost would fall 10-12 basis points and the earnings per share would be positively impacted by about 2.5 per cent," says a Goldman Sachs analyst. "Higher gross refining margins and lower interest cost would boost free cash flow, aiding the deleveraging of Essar's balance sheet," the analyst added.

Meanwhile, the stock market is abuzz with rumours Essar is scouting for an equity partner to sell part of its 89.89 per cent stake (after conversion of warrants) and is considering various options to raise funds. However, an Essar Oil spokesperson said the Ruias weren't looking to sell stake in the company.

On Monday, Essar Oil shares closed at Rs 54.15 apiece on the BSE exchange, down three per cent.

For the quarter ended September, the company reported a forex loss of Rs 770 crore; higher operating expenditure adversely affected operating margins. At Rs 820 crore, earnings before interest, tax, depreciation and amortisation was 21 per cent lower annually but 16 per cent higher than estimates.

"The reduction in interest costs is a positive, but not enough to offset weak metrics in the operating environment and the sheer weight of debt of Rs 22,000, on net worth of only Rs 1,500 crore," said an IDFC report released soon after the company's results were announced.