Shares of Essar Energy plummeted on Monday as it reported a drop in annual profits below market expectations and warned that three projects could be shelved.

The group said that earnings before interest, tax, depreciation and amortisation for the year ending in December 2011 fell by 10 per cent to $624.8 million, citing the sharp depreciation of the rupee, which had a $303 million impact on EBITDA.

Chief Executive Officer Mr Naresh Nayyar, who described the year as “very challenging” listed a number of setbacks the company had faced over the year, including a “disappointing” lack of movement on regulatory approvals, and the Supreme Court decision to overthrow the company's sales tax deferment scheme in Gujarat, which had allowed it to pay the sales tax in deferred instalments from 2021.

The company now faces a repayment of Rs 6,300 crore plus interest. Mr Nayyar said the company was in the early stage of discussions with the Gujarat Government, over the potential repayment of the sales tax in instalments, while at the same time appealing against the Supreme Court decision, but was confident that it would be able to meet any repayments through new bank facilities and $380 million of internal funds.

Regulatory climate

On the regulatory climate, Mr Nayyar said that the Prime Minister's decision to institute a committee to find a solution for coal supplies to power projects was a “clear sign of improvement”.

However, as a result of the difficulties the company would pursue a “derisking” strategy, regulating the capital it would devote to three of its power projects: Salaya II, Salaya III and Navabharat I. “Progress will now be based after the achievement of certain milestones,” said Mr Nayyar.

The news weighed on the company's share price, despite its optimism about improvements in the Indian economy and the strengthening of the rupee, and potential gains in refining margins at Stanlow, the British refinery it acquired from Royal Dutch Shell last year.

Extremely tough conditions in the European refining business had improved in January and February, the company said, while the improvement plan it had embarked upon would lead to up to $2 a barrel improvement on margins over the next 2 years.

However, the company declined to estimate when the division would become profitable.

Shares of Essar Energy tumbled in London on Monday, down 10.2 per cent at £1.13 in early afternoon trading.

Deutsche Bank cut its price target to £2.50 a share, from £3.50 a share. “Although there have been some positive signs on Government attempts to resolve issues on fuel sourcing, there remains a high degree of uncertainty in the short term,” the bank said, also citing the fact that the company might not participate in a $600 million capital raising by Essar Oil, which will increase the public holding of that firm's shares to around 25 per cent.

J.P. Morgan Cazenove cut its earnings per share estimate for the year ahead by 18 per cent, citing slippages in the delivery timeline for Salaya I, Mahan I and Vadinar phase 2.

“In our view, this name is much more sensitive to the news relating to the status of its expansion plans than its half yearly earnings,” the analysts said.

Related Topics