INSTITUTIONAL SECURITIES

INDIA RESEARCH

Oil & GAS

RESULT NOTE: Q4FY11

BSE SENSEX: 19262

APRIL 13, 2011

Essar Oil
Stellar results, better times ahead

OUTPERFORMER

Rs136
Mkt Cap: Rs185bn; US$4bn

Key financials
(Year to March (Rs mn)
FY09 FY10 FY11 FY12E FY13E

Sales
378,867 366,330 471,200 523,117 560,774

yoy chg (%)

6,638.4 (3.3) 28.6 11.0 7.2

Net Profit
(4,227.5) 310.0 6,543.1 7,624.0 15,102.0

EPS (Rs)
(3.1) 0.2 4.8 5.6 11.1

yoy chg (%)

925.9 (107.3) 2,010.7 16.5 98.1

PER
n/a 597.8 28.3 24.3 12.3

EV/E (x)
21.5 21.8 14.7 10.1 7.5

Essar Oil delivered a consecutive strong quarter of profits and growth in Q4FY11; and we feel that the pieces are falling in place for the refiner to set a strong growth trajectory going forward. The refinery expansion is progressing well, and is set for commissioning by Q3FY12E, and the CBM asset at Raniganj is also set to deliver commercial production over the next quarter. With the global refining cycle turning, and the complexity and configuration of ISIEmergingMarketsPDF in-tatacap01 from 14.97.200.62 on 2011-06-24 07:16:03 EDT. DownloadPDF. Essar Oils refinery expanding at the right time, we see higher growth coming through from FY12-13E than earlier estimate. Reiterate Outperformer, with a revised TP of Rs175/share, 29% upside from here.

Key highlights

Revenues increased 27% yoy to Rs134bn, higher than our estimates, due to marginally higher volumes sold and higher crude prices and hence higher gross realizations. Full year revenues at Rs470bn were 29% higher yoy. Total volumes sold during the quarter were 3.6mt, as against estimates of 3.5mt. Full year volumes at 14.76mtpa were 7% higher yoy. Capacity utilization remained on an upward trajectory, with Essar Oil (EOL) achieving 140% capacity utilization in Q4FY11 and 141% for FY11. GRMs for Q4FY11 were at US$8.1/bbl, compared to US$5.2/bbl for Q4FY10, reflecting the improved refining environment and higher heavy-light crude spreads, which helped raise Asian benchmarks (Singapore GRMs at ~US$7/bbl). Resultantly, EBITDA margins were at 6.6% (+70 bps yoy) during the quarter, to reach Rs9bn, in line with estimates. Full year EBITDA at Rs27bn showed a 43% growth yoy. The combination of higher EBITDA and lower depreciation and interest costs meant that PAT for the quarter grew 78% yoy to Rs3.2bn (our est of Rs1.75bn). Full year PAT of Rs6.5bn showed a 20x increase yoy.

Probal Sen probal.sen@idfc.com 91-22-6622 2569 For Private Circulation only. Important disclosures appear at the back of this report SEBI Registration Nos.: INB23 12914 37, INF23 12914 37, INB01 12914 33, INF01 12914 33.
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Essar Oil EBITDA and GRMs

EBITDA (Rs m - LHS) 12,000 GRM (US$ / bbl - RHS) 14.0

9,000

10.5

6,000

7.0

3,000

3.5

0 Q1FY09 Q2FY09 Q3FY09A Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11

0.0

Source: IDFC-SSKI Research, Company

Product slate veering towards middle distillates

The company is managing to deliver on its intention to increase the proportion of more profitable light and middle distillates in its product slate, thereby reducing the proportion of heavy distillates and providing support to GRMs going forward. It is also continuing to improve the proportion of heavier and sour crudes in its sourcing portfolio, which should result in higher GRMs once the heavy light spreads improve Essar Oil crude sourcing slate
100% 75% 50% 25%
25%

Essar Oil product slate

Light distillates 100%

Heavy EDT. Middle distillates ISIEmergingMarketsPDFand sweet crude Light in-tatacap01 from 14.97.200.62 on 2011-06-24 07:16:03 distillates DownloadPDF. Sour and tough crude

75%

50%

0% Q1FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4Fy11 18m tpa (est) 20m tpa (est) FY09
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 0%

Source: IDFC-SSKI Research, Company

Refinery expansion: Deferment of commissioning to Q3FY12E

Essar Oil has revised its capacity expansion plans upwards to Sep-Oct CY11E, partly because of delay in delivery of some VGO components from a Korean vendor, and also because of the deferment of the 35 day shutdown needed to tie in all the facilities to the existing refinery to September. The deferment was necessitated by higher demand for Diesel domestically, as Asian market for Diesel is very tight post Japan crisis. However, the company has already achieved ~86% progress on the project overall, and we remain confident that the October 2011 timeline for the expansion will be met. Given the revision in the timelines we do tweak our thruput assumptions for FY12 downwards, but the impact is marginal as we had built in July commissioning in any case, which we now push by a quarter. Our full year volume assumption now stands at 15m tap instead of 15.8m tpa earlier.

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E&P starting to emerge as a value add

We have mentioned in earlier that the E&P business is not really valued by the street, and we see significant value in the Ratna series field (2P reserves of 80mmbbl net to Essar) and CBM (potential resources of 3 tcf). The company has moved ahead materially on realizing some of this potential, with production from Raniganj expected from Q2FY12, and recoverable reserves being pegged at 1 tcf, suggesting a recovery factor of 33%. Peak production of 3.5 mmscmd is expected to be reached in year 3 of operations, and remain at a plateau of at least 15-16 years. The company has also allayed concerns around being able to place this gas in the market by signing a long term gas contract with Matix Fertilizers which is setting up a 1.3mtpa Ammonia plant in Panagarh for 2.8 mmscmd. The contract runs for twenty years, with first gas supply expected FY13 onwards Apart from this, the company has an attractive E&P asset portfolio, comprising a mix of crude oil and natural gas assets, ranging from early stage exploration prospects to discovered, appraisal stage blocks, comprising a total of 150 mmboe of net 2C resources and another 1.3bn boe of prospective resources.

Domestic demand remains strong

In a scenario of global demand being still off its 2007 peak despite early signs of revival, Essar is reaping the benefits of focusing on the domestic market, which is still growing robustly. Estimates of domestic demand for most refined fuels point to moderate to strong growth over the next five years, indicating good volume support for Essar. However, the key monitorable will be refining margins, which may get affected more than estimated in case of demand destruction if crude persists above US$125/bbl levels.. Essar market mix
Domestic Export

Domestic product demand

(TMT) 90000 Light distillates Middle distillates Heavy distillates

ISIEmergingMarketsPDF in-tatacap01 from 14.97.200.62 on 2011-06-24 07:16:03 EDT. DownloadPDF. 100%

75%

67500
50%

CAGR Light distillates- 3% Middle distillates- 6% Heavy distillates- 7%

45000
25%

22500
Q1FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY09 0%

0 FY08 FY09 FY10 FY11 FY12 FY13

Source: Company, IDFC-SSKI Research, Crisil Research, Company

Valuations & View

The successful listing of Essar Energy in London, followed by the infusion of US$500mn as Equity in to Essar Oil has allayed a lot of concerns investors had around funding for Essar Oils refinery expansion. With Phase I 86% complete and set to be commissioned by Q3FY12E, and an additional 2 mtpa of capacity coming on-stream September 2012 via optimization of the VBU unit, Essars prospects going forward remain robust. The emerging E&P business is set to add another leg of growth to the company over FY10-14E. We see the timing of commissioning of Phase I coinciding nicely with the expected revival in the global economy, providing a boost to valuations over the long term. Further, the incremental improvement in refining margins worldwide due to the economic revival will favorably affect GRMs for Essar in the near term. The positive results in Q4 drive a revision upwards of FY12E-13E estimates, with refinery utilization and margins being above our estimates, while lower debt also means that interest costs will be lower going forward. We duly adjust our EPS estimates for FY12E by 7% and FY13E by 9% to factor in the higher refinery volumes and lower debt burden due to promoter equity infusion. Our revised TP of Rs175 provides a 29% upside from here. Outperformer

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Quarterly results
1QFY10
Net Sales yoy chg (%) Operating profit yoy chg (%) Other income Interest Depreciation Forex losses/gains + inventory MTM PBT Tax rate (%) Misc. Expenditure written off Tax Reported Profit yoy chg (%) Adj Net profit 340 1,690 457.6 1,690 (190) (940) na (940) (150) (2,260) na (2,260) 1,800 (72.7) 1,800 (30) (700) na (700) 140 1,300 na 1,300 680 2,730 na 2,730 1,010.0 3,210 na 3,210 65,970 (24.9) 6,580 (14.5) 90 2,850 1,790 (2,040) 2,030 (16.7)

2QFY10
95,900 (30.1) 3,460 (26.1) 80 2,840 1,830 (1,920) (1,130) (16.8)

3QFY10
99,270 17.9 2,210 (51.5) 80 2,850 1,850 3,050 (2,410) (6.2)

4QFY10
104,820 53.8 6,180 (39.0) 630 3,200 1,810 1,800 0.0

Q1FY11
105,620 60.1 3,990 (39.4) 80 2,990 1,810 (730) (4.1)

Q2FY11
109,420 14.1 6,120 76.9 220 3,060 1,840 1,440 (9.7)

Q3FY11
122,710 23.6 7,650 246.2 620 3,010 1,850 3,410 (19.9)

Q4FY11
133,560 27.4 8,850 43.2 270 3,090 1,810 4,220 (23.9)

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Analyst
Pathik Gandotra Shirish Rane Nikhil Vora Nitin Agarwal Chirag Shah Bhoomika Nair Hitesh Shah, CFA Bhushan Gajaria Salil Desai Ashish Shah Probal Sen Chinmaya Garg Abhishek Gupta Saumil Mehta Vineet Chandak Kavita Kejriwal Anamika Sharma Varun Kejriwal Swati Nangalia Nikhil Salvi Kavitha Rajan Dharmendra Sahu Rupesh Sonawale Dharmesh R Bhatt, CMT

Sector/Industry/Coverage
Head of Research; Financials, Strategy Construction, Power, Cement FMCG, Media, Mid Caps, Education, Exchanges Pharmaceuticals, Real Estate Metals & Mining,Telecom, Pipes, Textiles Logistics, Engineering IT Services Automobiles, Auto ancillaries, Retailing Construction, Power, Cement Construction, Power, Cement Oil & Gas Financials Telecom, Metals & Mining Metals, Pipes Real Estate Strategy, Financials IT Services FMCG, Mid Caps Media, Education, Exchanges, Midcaps Construction, Power, Cement Strategy, Midcaps Database Analyst Database Analyst Technical Analyst

E-mail
pathik.gandotra@idfc.com shirish.rane@idfc.com nikhil.vora@idfc.com nitin.agarwal@idfc.com chirag.shah@idfc.com bhoomika.nair@idfc.com hitesh.shah@idfc.com bhushan.gajaria@idfc.com salil.desai@idfc.com ashish.shah@idfc.com probal.sen@idfc.com chinmaya.garg@idfc.com abhishek.gupta@idfc.com saumil.mehta@idfc.com vineet.chandak@idfc.com kavita.kejriwal@idfc.com anamika.sharma@idfc.com varun.kejriwal@idfc.com swati.nangalia@idfc.com nikhil.salvi@idfc.com kavitha.rajan@idfc.com dharmendra.sahu@idfc.com rupesh.sonawale@idfc.com dharmesh.bhatt@idfc.com

Tel. +91-22-6622 2600

91-22-662 22525 91-22-662 22575 91-22-662 22567 91-22-662 22568 91-22-662 22564 91-22-662 22561 91-22-662 22565 91-22-662 22562 91-22-662 22573 91-22-662 22560 91-22-662 22569 91-22-662 22563 91-22-662 22661 91-22-662 22578 91-22-662 22579 91-22-662 22558 91-22-662 22680 91-22-662 22685 91-22-662 22576 91-22-662 22566 91-22-662 22697 91-22-662 22580 91-22-662 22572 91-22-662 22534

Equity Sales/Dealing
Naishadh Paleja Paresh Shah Vishal Purohit Nikhil Gholani Sanjay Panicker Rajesh Makharia Nirbhay Singh Suchit Sehgal Pawan Sharma Dipesh Shah Jignesh Shah Suniil Pandit ISIEmergingMarketsPDF Mukesh Chaturvedi Viren Sompura Rajashekhar Hiremath

Designation
MD, CEO MD, Dealing MD, Sales MD, Sales Director, Sales Director, Sales SVP, Sales AVP, Sales MD, Derivatives Director, Derivatives AVP, Derivatives Director, Sales trading in-tatacap01 from SVP, Sales trading SVP, Sales trading VP, Sales trading

E-mail
naishadh.paleja@idfc.com paresh.shah@idfc.com vishal.purohit@idfc.com nikhil.gholani@idfc.com sanjay.panicker@idfc.com rajesh.makharia@idfc.com nirbhay.singh@idfc.com suchit.sehgal@idfc.com pawan.sharma@idfc.com dipesh.shah@idfc.com jignesh.shah@idfc.com suniil.pandit@idfc.com 2011-06-24 07:16:03 mukesh.chaturvedi@idfc.com viren.sompura@idfc.com rajashekhar.hiremath@idfc.com

Tel. +91-22-6622 2500

91-22-6622 2522 91-22-6622 2508 91-22-6622 2533 91-22-6622 2529 91-22-6622 2530 91-22-6622 2528 91-22-6622 2595 91-22-6622 2532 91-22-6622 2539 91-22-6622 2693 91-22-6622 2536 91-22-6622 2524 EDT.91-22-6622 2512 DownloadPDF. 91-22-6622 2527 91-22-6622 2516

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