Essar Oil - Q3FY14 Beats Street Estimates

Essar Oil announced its December quarter results and the financial performance of the company has been better than the street estimates.  While the topline for the quarter ended December 2013 stood at Rs 27385 crore as compared to Rs 25909 crore posted in the December 2012, due to lower GRM the EBITDA witnessed a marginal decline. To put the numbers in perspective the EBITDA for the quarter ended December 2013 stood at Rs 1202 crore as against Rs 1241 crore posted in December 2012. PAT was up 63% to Rs 52 crore as against Rs 32 crore in Q3FY13. 

If we get in to the other details, the company’s premium over benchmark IEA margins for December 2013 reached a high of USD 9.33/bbl. However if we consider the Current Price Gross Refining Margin (CP GRM) Q3FY14, it stood at USD 7.93/bbl Vs USD 9.75/bbl in Q3FY13. It was mainly on account of reduction of USD 2.16/bbl in the benchmark IEA Margins. As for the throughput for the December 2013 quarter was at 4.86 MMT (against 5.14 MMT) for 85 days, post around 7-day planned shutdown in Nov 2013. 

While the financial performance of the company was good, there is another positive factor for the stock. Essar Energy, which is the parent company, has converted FCCBs worth USD 262 million into equity shares of Essar Oil. While the FCCBs worth USD 115 million were converted at Rs 138 per share, FCCBs worth USD 147 million were converted at Rs 153. This is much higher than the current share price of Rs 53 per share. This conversion clearly indicates towards the confidence of promoters in the company and provides a solace to investor community.

If we take a look at the performance of the company for the 9MFY14, its gross revenues were up by 12% to Rs 79,498 crore from the levels of Rs 71040 crore in 9MFY13. Throughput was up 3% to 15.18 MMT from the levels of 14.69 MMT in similar period as mentioned above. As for GRM, the 9MFY14 the (CPGRM) stood at USD 7.27/bbl against USD 7.57/bbl in 9MFY13. On the EBITDA front also the performance was much stronger as the EBIDTA was up 27% at Rs 2,650 crore verses Rs 2,094 crore in Q3FY13. During the 9MFY14 the company converted around Rs 90 crore of its rupee debt through ECBs and swaps. We expect some benefit from the same to arrive in the next quarter.

The company has also stated that it is changing its retail strategy. In the existing Franchisee model where the Capex is made by dealers and the company compensates them with lease rent for land, ROI and margin on sale, in line with PSUs. Now the company will offer new retail outlets in all three formats. First is the continuation of Dealer Own Dealer Operated (DODO) franchise mode. Second is Company Owned Company Operated (COCO) & Company Owned Dealer Operated (CODO). The third is a new format like selective partial CODO. Here the company stated that the new outlets to be targeted are city centres (metros & state capitals) to achieve higher throughput of gasoline and at national highways to achieve higher sales of Gasoil. At current levels, it is too early to say whether the strategy would work or not. But the financial performance of the company is good and investors can accumulate the scrip at current levels.