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Business News/ Market / Mark-to-market/  To be, or not to be, with Essar Oil?
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To be, or not to be, with Essar Oil?

The delisting announcement comes at a time when the business has improved and things look rosy after the complexity of refining has increased

The worry is that refining margins are expected to remain range-bound for some time as analysts expect refining capacity and demand growth to be more or less balancedPremium
The worry is that refining margins are expected to remain range-bound for some time as analysts expect refining capacity and demand growth to be more or less balanced

To be or not to be, with Essar Oil?

That’s the question shareholders will face in the light of the company’s “voluntary delisting" announcement made on Friday after market hours. Essar Oil Ltd won board approval to delist from the Indian bourses, following its parent Essar Energy Holdings Ltd’s proposal to delist shares, PTI reported on Sunday, citing a company statement. The public shareholding currently stands at 27.5%.

Normally, delisting announcements are a time when shareholders want to collect the bonanza. Let’s consider Essar Oil stock’s performance. On Friday, the stock increased 1.6% on a day when the benchmark Sensex declined slightly. However, the company’s shares have already doubled since the beginning of this year, which means shareholders are already sitting on gains.

One reason the company is considering delisting is because it probably feels that the shares are undervalued, said an analyst. And why not? The delisting announcement comes at a time when the business has comparatively improved and things look rosy after the complexity of refining has increased.

For delisting, the company will set a floor price as per regulations and the shareholders can bid for a price. But shareholders must evaluate Essar Oil’s outlook before deciding what price is fair.

To start with, “this is the first full year of operations of our expanded refinery. The company has delivered excellent financials backed by solid operating performance, leading to improved gross refining margins (GRMs), Ebitda, and profit after tax for the quarter, and closed our financial year with a profit of 126 crore," the company said while announcing its 2013-14 results in May.

Ebitda means earnings before interest, taxes, depreciation and amortization.

In 2012-13, Essar Oil had reported a loss of 1,180 crore. March-quarter results were better, too, helped by higher GRMs, a forex gain and a decrease in finance costs.

While that augurs well, Essar Oil’s debt woes are well-known. As on 31 March, its debt (long-term borrowings plus short-term borrowings) stood at around 21,000 crore on a consolidated basis, which results into a debt-to-equity ratio of as high as 8.5 times. A higher debt naturally means a higher finance cost burden. Add to that, analysts expect debt to rise following the purchase of Vadinar Power Co. Ltd.

Essar Oil is in the process of converting its local currency debt to dollar-denominated debt, which is lower-cost. The company’s efforts seem to be bearing fruit as finance costs did decline in the March quarter, both sequentially as well as on a year-on-year basis.

The worry is that refining margins are expected to remain range-bound for some time as analysts expect refining capacity and demand growth to be more or less balanced. And then, debt remains a concern.

The above are some factors that investors could keep in mind before deciding the price to bid farewell. Delisting should help shareholders gain from current levels—just how much and whether they would have been better off if it had remained listed, will be known only later.

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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: 22 Jun 2014, 07:23 PM IST
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