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Essar Oil’s scrip has rallied significantly and outperformed the Sensex in the past three months, currently more than doubling to Rs 108. The stock has been abuzz on news of possible delisting of the company.
The buzz became louder after June 10, when UK-based parent Essar Energy delisted its shares from the London Stock Exchange. Essar Energy holds 71.22 per cent in Essar Oil. Finally, late on Friday, Essar Oil announced its board would meet on Monday to consider the proposal to delist the company from both the BSE and the National Stock Exchange. After the board's nod, Essar Oil will make an offer to buy back 137 million shares or a 27.53 per cent stake held by the public and other non-promoters. The company is yet to announce the price it is willing to offer.
Though most experts are sceptical of the Essar group's corporate governance practices, they believe investors should exit only at a premium.
S P Tulsiyan, CEO, sptulsian.com, says, "Essar Oil management has been very investor unfriendly, as in the case of Essar Steel’s delisting. According to me, the right delisting price should be at least Rs 150 but it is unlikely the management will give that. I believe retail investors should exit if the Essar Oil scrip opens above Rs 125 on Monday."
On Friday, in a relatively flat market, Essar Oil closed 1.6 per cent up at Rs 108.40 on the BSE.
Some, however, believe the delisting price could be lower than the current market price. Abhishek Jain, head of research, JHP Securities, says, "I believe Essar Oil's indicative delisting price will be lower than its current market price — as was the case with Essar Steel delisting. Thus, it is better to exit the stock in Monday's rally."
Nevertheless, most experts believe investors should not hurry and wait for the right price. They question the timing of the delisting. That’s because the company is on the brink of reaping benefits from the huge investments it made in recent years. Second, the tough times are expected to reverse.
Essar Oil, which has a fully operational 20 million tonnes per annum refinery, witnessed strong gross refining margins (GRMs) of $10.12 a barrel in the March quarter.
The refinery has a complexity of 11.8 (among most complex refineries globally, enabling it to earn higher margins) and has been operating at 100 per cent capacity.
Essar’s GRMs have consistently stayed above the Singapore-Dubai GRM since the June 2012 quarter, according to Elara Capital estimates. For the March quarter, its interest costs also fell 25 per cent year-on-year (14 per cent sequentially) to Rs 690 crore, as the company dollarised its rupee debt worth $1 billion (interest costs for FY14 declined six per cent to Rs 3,218 crore). The rupee debt stands at Rs 21,000 crore after this.
It plans to dollarise another $1-1.5 billion worth of debt, further easing interest costs. With cash flows expected to improve in the coming years and a large part of the capital expenditure behind it, the company is planning to repay part of the debt from its internal accruals.
As a result, analysts estimate its net debt/equity ratio to come down from 7.4 times in FY14 to 2.6 times in FY16.
The improving performance has helped Essar Oil turn around. After posting losses in FY12 and FY13, the company earned net profit of Rs 126 crore in FY14 (including foreign exchange loss of Rs 1,226 crore versus Rs 651 crore in FY13).
In FY15, according to Bloomberg consensus estimates, the company’s net profit (adjusted for one-off items) is pegged at Rs 1,163 crore as it gains from lower interest costs, improving production and stable GRMs, while for FY16, it is expected to jump 23 per cent to Rs 1,429 crore.
Meanwhile, promoters have to ensure that their holding crosses a minimum 90 per cent for the delisting to be successful. And this may not be easy for Essar, until it pays the right price.
Arun Kejriwal, director, KRIS, an investment advisory firm, says, "Essar Oil never paid dividend and now when the time has come (for shareholders to benefit) as they (Essar Oil) are profitable, the company plans to delist. The delisting price has to be at a premium from current market price. I think shareholders should unite against promoters.”
We think investors should wait for the announcement of de-listing price, says Kejriwal.
