Essar Energy should return to profitability in its current financial year, the company’s CEO, Mr Naresh Nayyar, said on Monday, after the firm reported a pre-tax loss of $1.14 billion for the fifteen months ending in March, hit by the costs relating to its loss of the Gujarat tax case in the Supreme Court in January and interest charges.
Following the completion of the expansion and optimisation of its Vadinar refinery, improvements to margins would raise EBITDA by around $700 million annually, while progress with operational improvements at its Stanlow refinery in the UK was expected to add up to $225 million to annual EBITDA.
These and the addition of new power generation capacity, meant that most of the project risks the company had borne over the past year were over, he argued. “We have created assets and increased the capacity of our refinery and power businesses which have all started delivering now”, he said in an interview, “All at once the results start coming – we believe our stock price should react.”
The company’s stock has fallen sharply over the past 12 months, from €3.85 a share to €1.25, knocking it out of the FTSE 100.
Stock dips
Shares of Essar Energy fell sharply on Monday, down over 6 per cent in afternoon trading, following the results, and despite news that the company had received provisional approval for forest clearance for the Madhya Pradesh Mahan coal block by the Group of Ministers.
“It is only a matter of time when it gets listed in the cabinet agenda and cleared there — this should happen in the next few months,” Mr Nayyar said.
The issue of coal sourcing continues to overshadow the company, with analysts expressing concern about coal linkages for its Mahan I and Tori power projects, and the potential costs should this not succeed. “If Essar has to source fuel at market rates for its Tori plants, then this could lead to challenging economics initially for these plants, from 2014, when they are due to be commissioned,” wrote Deutsche Bank analysts following the results. Mr Nayyar said he was ‘quite confident’ that the application for linkages would be successful.
The company is also in ‘advanced stages’ of agreeing contingency funding, which it hoped to have in place in the next few weeks, should its bid to pay its $1.2-billion Gujarat tax liability in instalments fail. The costs of funding could be in the 12-13 per cent range, the CFO, Mr P. Sampath, said.
Increased efficiency
Turning to Stanlow, the UK refinery that Essar Energy bought last year from Royal Dutch Shell, Mr Nayyar said the company hoped that within the next two to three months the results of its initiative to increase efficiency would begin to be seen, resulting in a $2-3 a barrel margin gain.
There were no immediate plans to bring product from India — something the company highlighted as an option when it acquired the refinery.
“We are evaluating this on a continuous basis. We are producing very large quantities of gas oil but this optionality will no be exercised where there is real economic value for the company.”
Essar Energy reported a loss of €764.3 million after tax for the 15-month period, after a €248.3-million profit for the preceding 12 months, even as adjusted EBITDA rose 42 per cent to €613.1 million.
Results were impacted by the depreciation of the rupee against the dollar, and exceptional costs totalling $2.1 billion.