Essar Energy invests $225 million in Essar Oil

Essar Oil, the oil refining and marketing arm of the Essar group, has tied up all the funds required for the first phase of its ambitious Rs 8,000 crore refinery expansion in Gujarat.

The latest infusion came in the form of an equity contribution of $225 million (Rs 1,050 crore) by Essar Energy, the recently formed company, now listed on the London Stock Exchange (LSE).

With this, Essar has brought in a total of $818 million (Rs 3,800 crore) in the form of equity, out of the Rs 7,800 crore expected to be required for the project and is on track to complete the first phase expansion by March.

The contribution is higher than the earlier projection of getting only Rs 2,000 crore through equity and is expected to give added comfort to those who have promised loans.

However, it is in keeping with the statement released by the company a few weeks ago stating that it has tied up loans of Rs 4,600 crore for the project and did not intend to raise any more debt for the first phase expansion.

With the latest infusion, Essar Oil will have around Rs 8,400 crore at its disposal for the expansion, which will see its capacity go up from 12.8 million tonnes (mt) to 16 mt.

Without the IPO the company would not have been able to raise the requisite funds for the expansion as it would not have had enough equity to balance out the debt required for the project.

The massive expansion, to be completed in two stages, has been delayed due to the economic downturn. The company had earlier wanted to complete both the first and the second phase of the expansion by end of 2010, taking the total capacity to 34 mt.

The second phase involves putting up a new refinery, adjacent to the existing one with a capacity of 16 mt and at a cost of around Rs 16,000 crore.

Over the last few months, the Ruias — promoters of the company — have also moved their holding in Essar Oil from a clutch of companies to a newly created firm called Essar Energy.

Essar Energy, which held the 86% stake held by the promoters in Essar Oil, was then divested to the public to the extent of 23% on the LSE, raising $1.95 billion (Rs 9,000 crore).

The latest cash infusion has come in the form of repatriation of part of the IPO proceeds of Essar Energy and will increase Essar Energy’s holding in Essar Oil by around 4 percentage points, taking it close to 90%. The issue of 71 million new shares in Essar Oil in favour of Essar Energy will reduce the public shareholding to 10.04%, an official said.

Meanwhile, the funding is likely to be a shot in the arm for the ailing refining company, which has already been bogged down by close to $3 billion in debt.

Interest costs during the last year were a whopping Rs 1,179 crore, compared to pre-interest, pretax profits of Rs 1,208 crore.

The $3 billion refinery is also hampered by its low ‘cracking’ capacity of around 6.1, restricting the refinery to cracking only higher priced, ‘light’ crude oil, resulting in low margins and profits.

The nearby plant of Reliance Industries has nearly twice the cracking capacity and almost twice the margin on refining.

The expansion is seen as a do-or-die for Essar Oil as it will increase its cracking ability to 11.8, allowing it to feed in heavier, and therefore cheaper, crude to produce petrol, diesel, etc.