Essar Oil expects maiden profit this fiscal

Gupta told Promit Mukherjee his priority now is to generate returns for shareholders and then plan the next course of action for the company’s next big leap forward. Excerpts from the interview:
 
You completed the expansion of your refinery last year. What is the status now?
We completed the refinery expansion in March 2012 and optimisation in June. These two projects took our capacity to 20 million tonne per annum and complexity to 11.8. Now, our aim is to sweat the asset and keep it operational beyond 100% capacity and clock gross refining margins (GRMs) of IEA+$7/8 per barrel. IEA is the GRM benchmark used by UK-based oil refineries.

What kind of returns does refinery fetch now?
In our last year’s results, if you exclude the first quarter, we almost had an Ebitda (operating profit) of a billion dollars. But what we earn in Ebitda we spend in paying interest, which is in the range of 12%. Our earnings are in dollars, so our borrowings should also be in dollars, which is not the case now. We are now focusing to replace our rupee borrowings with dollar borrowings so that our interest cost is reduced and the maturity period is extended. Once that is done, it will be interesting to see the returns from the refinery.

How much are you selling through your retail outlets?
Retail sales are marginal but with diesel slowly getting deregulated, things are expected to change in six months. We currently have 1,400 outlets and another 200 are coming up. We want to increase the sales from these outlets to 200 kilolitre per day, which we achieved when the prices were similar to the PSUs. Once we achieve our historical average, we have a simple model that can be rapidly scaled up.

So what would be the next big leap for the company?
We have just completed and stabilised the refinery. The next important thing is to reduce our interest costs. This will require another 1-2 years, after that we will plan the next big thing. Right now my goal is to make sure that at least this year or next year our shareholders also to start getting something in return.

Will Essar Oil be able to close the current year with profit?
Yes, we should be able to close the current year in black – definitely. Because, if you take a billion dollar Ebitda which is Rs 5,000 crore, reduce the interest and depreciation which this year should be Rs 4,000-4,500 crore, we should end with some profit before tax.

Where do you source crude from? Has your sourcing from Iran come down?
We are buying crude from everywhere, right from Canada, Latin America, and Middle East. Our dependency on Iran for crude is coming down gradually because we are now consuming more of heavy and ultra-heavy. We used to source 25% from Iran, which is now roughly 20%. It can be replaced whenever we want to, but as long as the government is keen to have a relationship with Iran, we will continue.

With domestic capacity expanding rapidly, will you focus on India or export more?
We are exporting about 35% from the refinery currently. Last year, India’s throughput was 220 million tonne (mt), out of which 210 mt was available output. Of this, 38 mt was from the SEZ refinery, which was exported. So we were left with 180 mt or so, out of which around 10 mt went as fuel loss. Hence, effectively the country produced 170 mt for domestic consumption against a demand of 150 mt. At 4-5% growth rate, an additional requirement of 7-8 mt is generated every year so this surplus of 20-25 mt will be wiped out in 2-3 years. With Paradip and Nagarjuna coming up in two years, the demand-supply mismatch will just be maintained, so India will never have a huge surplus and there will be scope to sell products.