Mumbai: Energy company Essar Oil Ltd, part of the $17 billion (Rs82,110 crore) Essar group, is raising Rs4,600 crore from State Bank of India (SBI), ICICI Bank Ltd and IDBI Bank Ltd to fund the first phase of its refinery expansion plan.
Naresh K. Nayyar, managing director and CEO chief executive of Essar Oil, said over the phone on Monday that his firm company is finalizing the documentation required for the 10-year loan and is expected to sign an agreement with the banks next month.
He said the firm would use the money to expand refining capacity to 16 million tonnes (mt) a year by December 2010 from the current capacity of 10.5mt a year. Essar Oil plans to increase the capacity to 34mt by December 2011 in its second phase of expansion.
The project cost for the first phase is estimated to be Rs7,810 crore. Of this, Rs4,600 crore is to be raised through the debt and the remaining via equity. This means the project has about 60:40 debt to equity ratio.
Risk factor? Essar’s oil refinery at Vadinar, Gujarat. The company has a debt of Rs9,200 crore on its books, and with the latest deal, its exposure will rise to Rs13,800 crore.
According to an SBI executive, the company has managed to tie up this money at the current prime lending rate (PLR). The bank’s prime rate is now 11.75%.
PLR is the rate at which a bank is expected to lend money to its prime customers.
“This is primarily a rupee loan with a very small foreign currency component,” the executive said, without divulging further details. He didn’t want to be identified as he is not supposed to talk on a particular borrower.
Essar Oil’s ability to raise funds indicates that Indian banks are willing to lend.
In the first quarter of fiscal 2010, banks have lent only Rs23,198 crore. The year-on-year credit growth of the banking system has dropped to 16.3%, from 25.5% a year ago.
Banks committed at least Rs6 trillion worth of loans to firms in the second half of fiscal 2009, but few firms are actually raising the money.
Essar Oil has a debt of Rs9,200 crore on its books, and with the latest deal, its exposure will rise to Rs13,800 crore.
Essar Oil finance director P. Sampath said it is not difficult to service these debt levels as the firm is raising capacity and technical competence. “We are increasing the Nelson complexity of our refinery from 6.1 to 11.8 for our phase I expansion plan. With this upgradation, it will not be a difficult task to service huge loans.”
Nelson complexity is a scale or index of a refinery’s ability to process inferior quality crude petroleum. Essar Oil aims at 12.8 Nelson complexity on capacity expansion to 34mt by December 2011.
Sampath said the promoters have already brought in Rs1,200 crore. “The remaining fund will be sourced through internal accruals and equity.” He said the company requires capital and will tap the stock market but wouldn’t say when. Its shares ended flat on the Bombay Stock Exchange on Tuesday at Rs139.25.