Ruias to invest Rs 2K cr in Essar Oil

Essar Oil promoters, the Ruia family, will put in Rs 2,000 crore into the company, clearing the way for the Rs 7,800 crore expansion and upgrade of its Vadinar refinery, the second-largest such plant in the private sector in India.

The company said Rs 4,600 crore of the remaining Rs 5,800 crore has already been “tied up” in the form of debt.

The remaining Rs 1,200 crore is expected to come in either from the proposed listing of its parent firm Essar Energy in London or further investment by the promoters, according to company officials.

The company has been suffering low refining margins due to its inability to ‘value add’ its products by cracking heavier compounds into more lucrative products. The upgrade-cum-expansion is expected to help it compete better with global players, but the company has faced difficulty raising more debt on its balance-sheet, which already has close to $3 billion (Rs 14,000 crore) of debt.

 “The company is on track with its March 2011 mechanical commissioning target,” it said, even as the latest financial results showed why an upgrade is needed.

As expected, interest costs of Rs 1,179 crore burnt a hole in the company’s profits, reducing net earnings during the year to just Rs 29 crore on a turnover of Rs 42,407 crore.

However, excluding interest and tax, profits more than doubled, from Rs 547 crore to Rs 1,208 crore as company was able to curtail expenses. Despite a 1% increase in full year revenues, the firm was able to lower total operating expenses by 4.2%, buoying its bottomline.

Essar has a plan to raise Rs 11,750 crore ($2.5 billion) by selling around 20-25% of its newly created oil and power company, Essar Energy.  Currently, the promoter group has a stake of around 18.14% in Essar Oil, the public holds around 11.4% and the remaining is with custodians of depository receipts.

The shareholding is expected to change with the infusion of Rs 2,000 crore by the promoters. The structure is also likely to be radically altered as the promoter holdings are expected to be consolidated under the ‘Essar Energy’ holding company.

The company has been beset by a recession-afflicted market ever since it started operations two years ago. This is about to change, said Naresh Nayyar, managing director.

“We saw refining margins bottoming out in the last quarter. With the margins improving this quarter, we are hopeful that the refining business is gradually coming out of the doldrums,” he said.