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February 10, 2013 6:36 pm
The Anglo-Indian refining and power generation group updates on trading on Monday, with slow progress on securing local coal – required to drive power plants in the energy-hungry sub-continent – continuing to drag on its prospects.
However strong third-quarter margins of nearly $10 a barrel at Essar Oil’s refining business and profitable operation at Stanlow, its UK refinery bought for $350m in 2010 from Royal Dutch Shell, have driven a recent rally at the heavily indebted group.
Essar Energy, controlled by founders Ravi Ruia and his brother Shashi Ruia of India’s Essar conglomerate and which owns 87 per cent of Bombay-listed Essar Oil, has seen its shares rise from around 120p to 140p in recent months.
But concerns over the company’s ability to service high debt levels, that grew from $6.2bn to $6.7bn in the six months to September, contributed to a fall in Essar’s share price. It floated in London in May 2010 at 420p raising nearly £1.3bn before hitting an intra-day high of 600p seven months later.
Three weeks ago Lalit Kumar Gupta, chief executive of Essar Oil, told minority investors that the company aimed to raise up to $2.2bn after winning approval from the Reserve Bank of India to switch a large chunk of its borrowings out of rupees.
The plan mirrors moves by rival Indian oil refiner Reliance Industries to match its borrowing to dollar-denominated income. Two weeks ago Reliance raised a $800m perpetual bond, at a coupon of just under 6 per cent, signalling investor appetite for dollar-denominated Indian debt.
Rupee-denominated commercial borrowing commonly attracted an interest rate of 12-13 per cent, in part because of high inflation in India’s fast-growing economy.
Bank of America Merrill Lynch calculated that the refinancing of $2.2bn worth of rupee-denominated debt into external commercial borrowings endorsed by the Reserve Bank of India could reduce Essar Oil’s financing costs by $120- $150m. That compares with predicted full-year earnings for the coming year of $430m on revenues of $27bn.
Essar Energy’s net financing costs are expected to jump from $404m to $908m for 2012 following continued heavy capital investment across refining interests centred on Vadinar – India’s second biggest privately owned refinery – and power generation projects.
Analysts at Barclays suggest that a reduction of four percentage points could be achieved by Essar, saving up to $100m a year, based on switching half of Essar Oil’s $3.3bn outstanding debt.
Although positive on the planned debt restructuring, Barclays cautioned: “What remains unclear is how much saving will actually be achieved on an international market for assets that are based in India.”
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