Ruias-owned Essar Oil is expecting to achieve financial closure for the expansion of Vadinar unit by the second quarter of 2010. The Phase-II expansion will incur an investment of $4.5 billion (around Rs 21,150 crore), and the project appraisal is now being conducted by large domestic banks including the State Bank of India, ICICI Bank and IDBI Bank.
Essar is raising the Vadinar refinery capacity to 16 million tonne from 10.5 million tonne by December 2010 and further to 34 million tonne in Phase-II expansion, making it the country?s third largest refining company after Reliance Industries and Indian Oil Corporation (IOC). The company may also look at foreign currency financing, although it is yet to work out details of this. It is waiting for domestic banks to approve the project first.
Neeraj Gupta, CEO, Essar Capital, told FE, ?For Phase-I, where the refinery?s capacity is being expanded to 16 million tonne, the investment was $1.5 billion (around Rs 7,000 crore). The debt component for this was $900 million and equity, $600 million. This is already in place. For Phase-II expansion, our team is working on the financial closure and we are expecting to achieve the closure by the second quarter of 2010.?
The 10.5 million tonne base refinery had incurred a total investment of about $3 billion (around Rs 14,000 crore). The refinery is working at a capacity utilisation of 133% and can, therefore, process 14 million tonne of crude. In the Phase-I expansion, although the capacity will go up to 16 million tonne, the complexity of the refinery will go from 6.1 to 12.8, enabling the company to process a wide variety of crude. Swarnendu Bhushan, an analyst with HDFC Securities says in a report that ?with the increase in the complexity data to 12.8, Essar Oil will be in the league of the most complex refiners in the world. The average complexity index for American, European and Asian refineries average above 10.7 and 6, respectively.
Asked about the plans for foreign debt, Gupta said, ?For foreign debt, the markets outside of India have not opened up yet. Equity is doing well, but not the bank debt market. Bond markets are doing well, but for an Indian company to do bonds outside of the Indian markets is not very easy.?
Essar Oil has a debt of $2 billion in its books, Gupta said, adding that the debt to equity ratio of the company remains at 2:1, which is typical of large companies in the business.
A report on Essar Oil prepared by Probal Sen and Ramnath S of IDFC – SSKI Securities says that ?the timing of Essar Oil?s expansion would coincide with the expected economic revival, implying significant value addition over the long term.? The report goes on to add, ?While refiners across Asia are currently facing the heat with benchmark gross refining margins at historical lows, we feel margins have bottomed out.? They said that the recovery in FY2010-11 will be aided by a global economic revival and the imminent closure of standalone, inefficient refiners in Western Europe and the US.