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Interaction | May 2013

Essar Oil to bring down its interest payment by $150mn

Essar Oil, the country's second largest private sector refiner, has closed the last fiscal by doubling capacity to 20 million tonne per year. In a free-wheeling chat with Pradeep Pandey, L K Gupta, Managing Director and CEO, shares the company's future strategy on debt refinancing and his take on oil price deregulation.

What is your observation on current global as well as Indian energy market scenario?
Indian scenario, I think in the last about six months, has undergone some change and some decisive changes have taken place. For example, it was for the first time that the government was able to hold on to whatever it did-the government deregulated petrol prices. It could be seen as a major change. Secondly, for the first time last year they increased the diesel prices. Petrol is now being sold 100 per cent on market rate, diesel for bulk consumers is also at market rate. There are challenges (in implementing the bulk diesel price hike) but anyway, anything you do there will be challenges.

Deregulation in petroleum sector is happening, which is good for the government, consumers and the industry. Good for government, because naturally, the subsidy burden will go down. They will be able to spend this money for some better use. Good for consumer because until now if you did not pay the right price, you did not think of optimizing its usages. People were using diesel where they could have used fuel oil because diesel was cheaper than FO. So now as the price correction is taking place in line with real market and economic price, optimization will be more efficient in use. On other side for the industry also it sounds well because up till now you were having the three companies (state run OMCs such as HP, BP and Indian Oil) and only they have to compete among themselves. They do not have any outside competition. But with price deregulation they (public enterprises) will find private sector entering into the game, then the real competition will start.

How this deregulation in the oil prices will improve the market and how long it may take to reach at a standard level, making the market subsidy free?
It may take about a year more because 45 paise a month for 12 months, which is about Rs 6 by the end of year. After that you will be nearer to the market price provided the crude oil prices do not go up substantially and the rupee also does not depreciate further. I mean there are lot of provisions that might decide the movements and impact the market.

Post deregulation is Essar Oil planning to revamp its retail business?
We already have 1400 outlets and we are present in all parts of India and not somewhere only in Gujarat. It is right across North, West, East and South we have our presence. In addition to this we can start additional 200 outlets any day. Our 1,400 outlets are operational but they are doing only petrol. Going ahead, we will also have diesel sale after the prices parity is reached.

Through this 1400 outlets how much sales in volume you expect?
The industry average today for diesel is about 140 kiloliter (kL) per month per outlet. Private sector outlets have always outperformed the industry average in the past when there was a free market. So if you take, let us say about 150 kL per month per outlet, this transforms to about 240,000 kL per month or about 3 million KL per year, which is a big quantity. Today, our total sale to the industry is about 6 or 7 million tons, so 50 per cent of it we will be able to sell directly, and then additionally also supply to bulk consumer. Today however, although bulk consumer market is open, but what happens is that State Road Transports have gone to retail. They are not accepting this deregulation, so they are fueling from the retail pumps.

What is your take on diesel price deregulation?
We believe that once the retail price comes to the normal level, then bulk of course will also be sold at normal price, so there also we will get market share. So our take is that substantial quantities of our product will go through our own network. That is where the real competition will start, and at any place where there is competition, it is the consumer who gains the most. So going forward, as complete deregulation unfolds, we see consumers benefiting. Diesel deregulation will result in optimization of fuel. Today, everybody is going for diesel vehicle because diesel is cheaper. As a refinery, at most times, I get a higher price for diesel than petrol when I supply to public sector companies, whereas when consumer buys this, he gets diesel at least Rs 20 liters cheaper, mainly because of subsidy on diesel by the government and higher taxes on petrol.

Essar Oil has achieved the break even in its balance sheet. What were the major factors helped the company in achieving this and going ahead what kind of expectations you are having for growth?
We have actually done two or three basic things in 2011-2012 and beginning of 2012-13. First we completed our expansion which took our refinery capacity from 10.5 to 18 million tonne per annum. The second was that we did some optimization which took our capacity from 18 MT to 20 MTPA. All these were completed by June 2012. So from June 2012 we are running our refinery at an annualised capacity of 20 million plus. In every quarter since then, for example in September quarter we did 5.07 MT and in December quarter we did 5.14 MT, we have processed over our rated capacity. So one is that our capacity is now one and a half time of what we were doing earlier.

In addition, our complexity has also gone up, which means that we now use a lot of heavy and ultra heavy crudes which are available at a lower price because everybody cannot process them. In spite of using more of heavy crudes, we are producing distillate or product slate which is 85 per cent petrol, diesel, ATF, kerosene, LPG and naphtha. All these products are sold at higher prices as compared to the crude prices whereas earlier we were producing almost 30 per cent product which were lower than crude price. Another thing which is quite unique to us is that our power plant runs on coal as opposed to fuel oil and naphtha. Normally refineries run their power plant with their fuel oil.

So there has been a structural change in our earnings from IEA +$3 to $4 /bbl to IEA +$7-$8/bbl which has actually started getting reflected in our earning from quarter 3, when we reported GRMs almost $10 a barrel.

How using coal instead of fuel oil helps?
It improves our margin by almost a dollar per barrel. If fuel oil is about $600 to $700 a tonne, that equivalent coal is about $200 a tonne. So it makes a substantial difference and that helps to improve the profitability.

Going forward also you feel that it may help to improve your margins?
Bulk of our capex is behind us and hence any GRM uplift will come from squeezing more efficiency out of our operations. Compared to when we were having gross refinery margin of $4 to $5 per barrel, we are now at $9 to $10 per barrel.

Coming to Essar Oil's plan for debt restructuring what is your next step after exiting the CDR scheme?
Basically, any refinery is a dollar driven company. For us, our currency is dollar even when we sell petrol and diesel in India. We actually sell in dollars which is then converted into rupees and we get rupees from the oil companies. So our currency is dollars, while our loans are in rupees, which is a mismatch and a risk.

On our own we have decided to exit the Corporate Debt Restructuring scheme, where we had concessional loans. By doing so our interest cost has gone up by about 60 basis points. But we have consciously decided to do it because until the time you are in CDR, you do not get proper ratings. Typically foreign banks or lenders stay away from CDR companies. Now that we are out of CDR, the immediate thing is that we will refinance our rupee loans through ECB and other routes. We already have approval from Reserve Bank for $2.27 billion for ECB which we will use to replace our rupee debt. This would provide us natural currency fluctuation risk and we may get about 6 per cent saving in interest payments.

How much interest the company is paying annually and after restructuring to what level it may come?
Currently, actually our interest on total of approximately $3 billion debt is about 11.5 to 12 per cent on an average, which means that we are paying somewhere around $ 400 million of interest on these loans. Once we are able to do all this refinancing, then we would save something about $150 million to $200 million.

Have you set any time limit for completing the refinancing?
We have already started and have done $480 million so far. We are targeting that in next six months, a substantial amount can be done.

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