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Business News/ Market / Mark-to-market/  Essar oil: strong revenue, weak profit for December quarter
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Essar oil: strong revenue, weak profit for December quarter

Weak operating performance and higher depreciation and interest costs hurt profit

Revenue for the December quarter increased sharply by 85% on a year-on-year basis to `23,882 crore. (Revenue for the December quarter increased sharply by 85% on a year-on-year basis to `23,882 crore.)Premium
Revenue for the December quarter increased sharply by 85% on a year-on-year basis to `23,882 crore.
(Revenue for the December quarter increased sharply by 85% on a year-on-year basis to `23,882 crore.)

Essar Oil Ltd is reaping the benefits of higher complexity in its refinery after expansion and optimization. The company reported a sharp improvement in its gross refining margin (GRM) in the December quarter. Last quarter, Essar Oil’s GRM stood at $9.75 per barrel compared with $2.82 a barrel in the same period last year.

Note that the GRM that Essar Oil discloses is the current price GRM, which incorporates certain adjustments to conventional GRM measures, including a different method of computing the cost of crude, revenues and export prices.

In the September quarter, GRM stood at $7.9 per barrel. Essar Oil explains, “with the differential of heavy and ultra-heavy crude price widening over the lighter variety, complex refineries like us, who are able to process lower price ultra-heavy and heavy crude, are realizing the gains of higher complexity." This has led to strong revenue growth as well. Essar Oil’s revenue for the December quarter increased sharply by 85% on a year-on-year basis to 23,882 crore.

But, and this is an important but, the not-so-good part is that while revenue numbers are good, the company reported a profit of just 32 crore for the quarter thanks to weak operating performance and higher depreciation and interest costs. Essar Oil maintains that profit would have been higher by 260 crore adjusting for a foreign exchange gain in the previous quarter. Still, adjusting for that, net profit margin works out to just 1.2%, not very encouraging.

At the end of December, Essar Oil had debt of 17,700 crore and its latest market capitalization stands at 9,942 crore. The progress on the efforts to cut debt would be an important variable to track for investors. The stock, though, has outperformed the benchmark Sensex from September end, suggesting that the positives of higher complexity have been factored in. Essar Oil anticipates a stable outlook for GRMs going forward.

Meanwhile, do Essar Oil’s December quarter GRMs mean that even Reliance Industries Ltd (RIL) could report GRMs close to what Essar Oil has reported? That’s unlikely to happen, say analysts. While RIL is expected to report better performance than average Singapore GRMs in the December quarter, it may not be as high as Essar Oil’s. Moreover, both companies report their GRMs differently and hence it may not be an apples-to-apples comparison. Essar Oil’s numbers therefore don’t necessarily indicate the exact trend for RIL, which is expected to announce numbers on Friday.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 15 Jan 2013, 07:33 PM IST
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