Indian Oil Corporation (IOC), the country’s largest refiner, is planning a combination of domestic and international borrowings to finance its proposed Rs 30,000-crore Paradeep refinery in Orissa, which will increase the state-owned company’s refining capacity by 25 per cent.
The company will raise Rs 14,000 crore from a consortium of 22-24 banks with SBI Caps acting as lead facilitator. A further Rs 4,000 crore will be mopped up via the external commercial borrowing (ECB) route. IOC will invest Rs 12,000 crore as equity into the project, said a company official.
“We are talking to various bankers to raise the debt. The refinery will be completed by 2012,” said the company’s Director in charge of refineries, BN Bankapur. The loans are likely to be tied up by the end of this year and IOC is planning to achieve financial closure by year-end.
A company can get up to $500 million (around Rs 2,100 crore) through the ECB route (automatic) in a year. Borrowings above this cap will need special government approval, which IOC, being a government-owned company, is confident of getting. ECBs allow companies the freedom to diversify their source of borrowings, and to take advantage of lower international interest rates. The borrowings are mainly for infrastructure projects in India.
The Rs 18,000-crore loan will enhance IOC’s already-high borrowings of Rs 43,500 crore, as at the end of July, a fourth of which is borrowings from overseas. The company’s average rate of overseas borrowings is around 7 per cent, while the borrowings from domestic banks are at over 10 per cent, an official in the company’s finance department said.
“We are going ahead with the refinery project even without financial closure,” Bankapur said. The company has acquired the land and is currently doing the in-fill work before construction begins.
Analysts say that raising the money will not be a problem for IOC, but it is the completion of the project itself and achieving good earnings from the refinery that the company will have to focus on.
“The outlook for refinery margins in 2011-12, when the refinery is expected to come up, is not good. Keeping the current situation in mind, the outlook is not ‘extraordinary,” said Vinay Nair, research analyst at Khandwala Securities.
IOC also plans to put Rs 12,000 crore of its own money into the project, at a time when it is facing a financial crisis. It recorded sales of around Rs 2,40,000 crore in the last financial year and profits of around Rs 7,000 crore, after accounting for oil bonds given by the government.
Without the bonds, the company would have reported losses.
The Paradeep refinery was originally planned to be set up along with a petrochemical plant. The company has, however, put off the petrochemical plant due to rising costs and as the company is facing a financial crunch due to losses from its fuel marketing division.
The Paradeep refinery project was approved by the Cabinet Committee on Economic Affairs (CCEA) in July 1998 at an investment of around Rs 25,000 crore. The project has been delayed as IOC searched for partners, but has still not found any.
“We are going ahead without a partner. We can do the project on our own,” said Bankapur, who looks after the company’s seven refineries.
Various names such as Venezuela’s PDVSA are reported to be interested in holding stake in the refinery. Company officials say the delay in the project has deterred foreign partners from acquiring stakes in the project.
