After a spell of weakness on the bourses for about six months, Essar Oil Ltd (EOL) has witnessed activity, with increased buying from investors recently. Analysts have turned bullish on the counter on the back of strong fundamental support and optimistic outlook about the private sector oil major.
“The current widening of light-heavy spreads due to a fall in Japanese fuel oil demand stands to benefit complex refiners like Essar Oil, despite a marginal fall in diesel or gasoline cracks. Reduction in debt and interest cost will be the driver for a re-rating,” stated Edelweiss Securities n its latest report on EOL. It maintained a ‘buy’ rating on the stock.
On the Bombay Stock Exchange (BSE), the shares closed at Rs 68.10 yesterday. In August this year, EOL had touched a low of Rs 46.70, amid uncertainty over its legal issues with the Gujarat government over the sales tax liability. EOL shares have gained 34 per cent since October 1 against the Sensex’s gain of 0.5 per cent. On October 5, it regained the Rs 60-level, previously seen in March.
According to analysts, the counter has seen heavy volumes on the bourses for a quarter. “EOL trades at heavy daily volumes, which means investors are increasingly flocking to the counter. The fundamentals are good and the company has already made provision for its sales tax liability with the Gujarat government,” said an analyst with a Mumbai-based equity research firm.
“During the quarter (July-September), with the decision of the Supreme Court on September 13, the sales tax matter is now fully concluded and our proposal for CDR (corporate debt restructuring) exit has been accepted by the lenders. Now, we are fully geared to deliver value to our stakeholders,” L K Gupta, managing director and chief executive officer, had stated in a media conference call on second quarter results earlier this month.
In its research report, Deutsche Bank noted the benefits of expansion and upgradation at the company’s Vadinar refinery would help EOL. It, too, has maintained a ‘buy’ rating on EOL.
“The company has a gross long-term debt of $3 billion (Rs 16,000 crore) as on September and a gross debt-equity ratio of 8.3, which is a worry,” stated a report by ratings major Credit Suisse.
EOL is at the end of its capital expenditure cycle, new units have stabilised and are operating at higher capacity, and second quarter throughput of 5.07 million tonnes implies over 100 per cent utilisation. “We think EOL should turn free cash flow-positive. There is also the likelihood of equity raising, which can help bring down debt,” the report noted.
Research firms continue to caution about EOL’s debts and expect the high interest cost would be a major hindrance for growth. Morgan Stanley Research stated, “Due to higher than-expected financial expenses, PAT (profit after tax) came at 30 per cent below our estimates, which underscores the impact of high financial leverage on the profitability.”
However, IDFC Securities believed the company’s effort to refinance part of its debt into lower cost external commercial borrowing (ECB) will reduce the interest cost burden. “At the current price, the stock trades at a multiple of 8.5 of (estimated) fiscal 2013-14 earnings and a multiple of six of Ebitda (estimate for earnings before interest, taxes, depreciation and amortisation), which we believe are fairly aggressive valuations, given the high depreciation/ interest costs and uncertain refining margin environment,” went its report.
“Our debt of Rs 15,000-16,000 crore are very much in the acceptable range and we are under no pressure from any of our lenders,” Gupta stated in the results’ conference call.
In August, he had expressed confidence in bringing the company to profits during the September quarter, after witnessing loss-making ones. The company did record a net profit of Rs 105 crore for the quarter.
