* Expects margins to rise by up to $5 a barrel
* Plans to sell stake of around 15 percent by June 2013
* Says reducing dependence on oil from Iran
By Simon Webb and Prashant Mehra
MUMBAI, April 26 A major upgrading of its
refinery in western India by refiner Essar Oil should
boost its margins by up to $5 a barrel, its chief executive said
on Thursday, adding nearly three quarters of a billion dollars
to its annual revenues.
Essar has just completed a $1.6 billion overhaul and
expansion at the Vadinar refinery, raising capacity to around
360,000 barrels per day from 280,000 bpd and adding units that
can process cheaper, heavier crude into fuels.
The refinery would reach 400,000 bpd capacity in September,
Managing Director Lalit Kumar Gupta said.
"The difference in our margins and those in our neighbouring
refinery, which is as complex as we are today, has been about $3
to $4/bbl. We should be able to bridge that gap now," Gupta told
Reuters in an interview.
The refinery would gain another $1 a barrel in margins
through using a coal-fired power plant to provide electricity,
which would save on fuel costs, Gupta said.
Essar had earlier forecast a 35 percent jump in revenues for
the fiscal year that started on April 1. Revenues for the
previous fiscal year were around $9.5 billion.
Essar plans to sell a stake of around 15 percent by June
2013, as required by India's market regulator to reduce the
stake held by founding shareholders to 75 percent from nearly 90
The company believes its shares are trading below value and
the price will improve after investors see it operate the newly
expanded refinery for two quarters, Gupta said.
That would be a better time for any stake sale, he added.
Given the full expansion will be completed in September, that
would push any possible stake-sell to close to the deadline.
"We will come to market when we are rightly priced. At the
current price we think we are heavily undervalued. We see
significant upside in our refinery business," Gupta said.
Essar Oil's market valuation stands at $1.3 billion and its
shares have barely changed so far in 2012, closing on Thursday
at 50 rupees a share, a fraction of the peak in 2008 of nearly
Essar, 87 percent owned by London-listed Essar Energy
, is one of only two private refiners in India.
The other is Reliance Industries, which operates
the world's biggest refining complex at Jamnagar in western
India and has among the best margins in the industry.
Reliance reported gross refining margins of $7.60 a barrel
for the March quarter, down from $9.20 a year ago.
Gupta said he expected refinery margins to rise in coming
quarters as the northern hemisphere summer driving season demand
kicked in and improved profits for making gasoline.
"Going forward, once the gasoline cracks are better, margins
can only go up," he said. "Definitely complex refineries have to
make more margins."
The company is currently negotiating with the government in
the western state of Gujarat more time to repay a $1.24 billion
sales tax due after India's top court dismissed Essar's petition
seeking a review of an earlier verdict to defer payment.
Essar, which has already booked a 40 billion rupees loss in
its books for the tax liability, hopes to service repayments
from the increased cashflows of its expanded refinery, but is
also in talks with several banks to raise funds for the payment,
Gupta said, but declined to name the banks.
"If the Gujarat government insists on some interest, to that
extent our earnings will definitely get impacted. But going
forward, we see strong cash flows and earnings, so we are not
unduly worried," Gupta said.
Essar will be able to use heavy crude for almost 80 percent
of its capacity and is gradually shifting to Latin American oil
from Venezuela, Colombia, Mexico and Brazil.
"Middle East crude slowly will get reduced in our basket. If
they are not low API, if they are costlier, we will reduce.
Ultimately, it's a question of optimising margins," Gupta said.
Essar is also reducing dependence on oil from Iran, its
single largest supplier, in line with plans by other Indian
refiners as international sanctions target the flow of Iran's
exports. The U.S. and its allies aim to reduce Iran's oil
revenues to pressure Tehran not to build nuclear weapons.
Essar had renewed a contract with Iran in January for
100,000 bpd, Gupta said, the same volume as last year.
Iranian crude would account for around 25 percent of Essar's
supplies when the expansion was completed, down from around 40
percent, he added.
Industry sources have told Reuters Essar plans to cut 15
percent from its 100,0000 bpd contract, which runs from April
2012 for a year. Gupta declined to comment.
Earlier this month, data published by a leading industry
consultant showed India has vaulted to the top of the list of
Iran's oil customers, overtaking China, in a first-quarter
buying surge ahead of tighter sanctions against Tehran this
India's Iranian crude imports could fall around 25 percent
from April, when new annual contracts take effect.
(Editing by James Jukwey)