Higher margins boost Essar Oil’s profitability

Higher margins boost Essar Oil’s profitability

Essar Oil Ltd benefited from rising crude oil prices, higher volumes and better refining margins in the December quarter. Its net profit more than doubled to Rs273 crore in the December quarter from the September quarter. However, profit growth was also helped by a sequential rise of 182% in other income to Rs62 crore, which includes Rs50 crore received after an arbitration award in its favour.

This is the second successive quarter of good performance, after the firm incurred a net loss of Rs70 crore in the June quarter. The company’s operating revenue increased by 12% from the September quarter. Rising crude prices were partly responsible for the jump in its revenue. Volume growth, too, contributed its bit to revenue growth, up by about 1% on a sequential basis. What matters most to a refinery is the gross refining margin (GRM). Essar’s GRMs rose by a good 11% on a sequential basis to $7.21 (Rs329 today) a barrel.

Refining margin is the difference between the total value of petroleum products produced by an oil refinery and the cost of the input (crude oil). The situation has improved for refining companies in the recent past. Singapore GRMs have averaged $5.5 per barrel compared with $4.2 per barrel in the September quarter. So refining firms were expected to benefit from better refining margins in the December quarter.

Essar Oil’s operating profit margin improved by 60 basis points to 6.2%. One basis point is one-hundredth of a percentage point. While it appears to be on a roll, the company is also in the process of expanding its capacity to 18 million tonnes per annum (mtpa), the mechanical completion of which is expected by the end of June. It will take a 35-day shutdown in May-June to complete the tie-ins required for the new units.

The company will also add another 2 mtpa of capacity in fiscal 2013, expected to be completed by September 2012. This will entail a capital cost of Rs1,700 crore. Essar Oil’s stock was up by 1.6% to Rs128.50 post-results on a day when the BSE Sensex showed a flattish trend. Since the beginning of the fiscal year, however, the stock has underperformed the BSE-100 index.