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Essar Oil Equity Research

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On December 2015, Essar Oil completed the process of delisting from the stock exchanges. The Company offered Rs.262.80 per share to its public shareholders, an 80% premium to the floor price of Rs.146.05 per share.

About the Company

Essar Oil Ltd (“Essar Oil” or the “Company” ) is an integrated oil & gas company with a strong presence across the hydrocarbon value chain. The Company is engaged in the exploration and production of oil and gas, refining of crude oil, and marketing of petroleum products. Essar Oil has a global portfolio of onshore and offshore oil and gas blocks, with about 35,000 sq km available for exploration and 750,000 bpsd (barrels per stream day) of global crude-refining capacity.

In the mid-stream segment, Company has a world-class highly complex refinery of 20 MMtpa (million metric tonnes per annum) at Vadinar, Gujarat, which has a crude refining capacity of 405,000 barrels per stream-day (bpsd).

In the upstream segment, it has a portfolio of eight oil and gas blocks in india with about 1.7 billion barrels of oil equivalent in reserves and resources.

In the downstream segment Essar Oil is a leading CBM (coal bed methane) players in india with more than 10 tcf (trillion cubic feet) of reserves and resources under 5 blocks. The Company operates a network of over 1,400 retail outlets across India, with another 200 under various stages of commissioning.

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Total Income from Operations 36,629.00 47,120.00 58,336.00 88,578.00 98,602.00
Expenses 1,902.00 44,469.00 56,660.00 85,536.00 93,545.00
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 1,902.00 2,651.00 1,676.00 3,042.00 5,057.00
Depreciation 736.00 731.00 762.00 1,296.00 1,355.00
Finance Costs 1,195.00 1,220.00 1,411.00 3,424.00 3,218.00
Other income 91.00 128.00 430.00 609.00 871.00
Exceptional items 111.00 1,226.00
PBT 62.00 828.00 (67.00) (1,180.00) 129.00
Tax 5.00 174.00 (178.00) 3.00
PAT (before Minority Interest and share of Associates) 57.00 654.00 111.00 (1,180.00) 126.00

Profitability Analysis

Standalone (%)
Particulars FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Operating Profit Margin Ratio 5.19 5.21 2.87 3.43 5.13
Net Profit Margin Ratio 0.16 1.39 0.19 (1.33) 0.13

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
Share Capital 1,218.13 1,218.13 1,382.27 1,382.27 1,382.27
Share Capital (Other than Equity) 110.28 1,153.21 1,340.00 1,340.00
Reserves & Surplus 2,807.42 2,807.11 2,149.46 798.47 (275.44)
Net worth (shareholders funds) 4,135.83 5,178.45 3,531.73 3,520.74 2,446.83
Minority Interest 118.25
Long term borrowings 10,313.85 10,353.73 11,618.33 12,202.80 14,538.73
Current liabilities 8,572.25 12,812.38 12,211.32 4,796.55 28,359.08
Other long term liabilities and provisions 6,427.99 4,796.55 2,221.21
Deferred Tax Liabilities 2.49
Total Liabilities 23,142.67 28,344.56 33,789.37 40,089.63 47,565.85

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
Fixed Assets 16,050.15 16,628.10 19,920.76 23,080.39 23,884.53
Noncurrent Investments 19.01 236.38 103.00 103.00 103.00
Current assets 5,430.26 8,907.49 1,703.38 1,809.64 21,105.65
Long term advances and other noncurrent assets 11,576.22 14,685.67 2,472.67
Other Assets 1,643.25 2,572.02 486.01 410.93
Total assets 23,142.67 28,344.56 33,789.37 40,089.63 47,565.85

Efficiency Analysis

 
Particulars FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
ROCE 30.56 45.99 17.50 11.65 17.91
ROE / RONW (11.68) 1.38 18.52 5.09 (48.23)

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Standalone
Particulars FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Total Income from Operations (Rs. Cr.) 36,629.00 47,120.00 58,336.00 88,578.00 98,602.00
Growth (%) (2.72 %) (28.64 %) 23.80 % 51.84 % 11.32 %
PAT (Rs. Cr.) 57.00 654.00 111.00 (1,180.00) 126.00
Growth (%) (111.80 %) 1047.37 % (83.03 %) (1163.06 %) 110.68 %
Earnings Per Share – Basic (Rs. ) 0.27 0.27 (30.75) (8.64) 0.90
Earning Per Share – Diluted (Rs. ) 0.27 0.27 (30.75) (8.64) 0.87
Price to Earnings 512.41 461.11 89.20

Dividend History

The Company has maintained an average dividend yield of 0.00 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. EOL’s average current ratio over the last 5 financial years has been 0.82 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

EOL’s average long term debt to equity ratio over the last 5 financial years has been 3.76 which indicate that the Company is operating with a high level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

EOL’s average interest coverage ratio over the last 5 financial years has been (4.11) times which indicates that the Company has not been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 30 September 2015, Essar Oil reported a promoter holding of 24.89 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 3.24 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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