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ESSAR OIL: Financial Analysis 2012

ESSAR OIL: Financial Analysis

Submitted By:

ANUJ KUMAR 11PGDM

BHASKAR MAZUMDAR 11PGDM

MANISH BANGA 11PGDM

RATAN KUMAR 11PGDM

SHRUTI RAJAMOHAN 11PGDM

FINANCIAL MANAGEMENT


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Table of Contents

FINANCIAL OBJECTIVE OF THE FIRM: ............................................................................... 3

TRIPLE BOTTOM LINE OF COMPANY: ................................................................................ 4

CAPITAL EXPENDITURE: ...................................................................................................... 7

CAPEX DURING THE PAST 5 YEARS: .................................................................................. 9

CAPITAL STRUCTURE:......................................................................................................... 10

SOURCE OF FUNDING: ......................................................................................................... 11

POLICY STATEMENT REGARDING CAPEX ...................................................................... 14

REFERENCES: ........................................................................................................................ 15


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FINANCIAL OBJECTIVE OF THE FIRM:

Stakeholder Vs Shareholders:-

The financial objective of the firm is to become a respected global entrepreneur by innovative

growth, through personal passion, reinforced by a professional mindset. Also to create enduring

value for customers and stakeholders in core manufacturing and service businesses, through

world-class operating standards, state-of-the-art technology and the positive attitude of people

involved. The company has employed vertical integration over the years keeping in tune the best

view of all stakeholders. The approach to the HR plan that the Company has embarked upon

encompasses understanding stakeholder expectations and aligning HR plans to achieve the

Companys business results. The endeavor is to bring about a paradigm shift in the approach to

the role HR plays in the Company from that of a traditional support function to that of a strategicbusiness partner.

The company aims to increase shareholders earnings per share by increasing the revenue and

managing its cost effectively.

Wealth maximization vs. profit maximization:-

The company constantly looks for Expansion projects keeping highly competitive Capex. By

expanding at a tremendous rate by acquiring/developing/enhancing capacity, company constantly

looks to maximize its wealth. However only source of profit maximization is keeping check on

Fuel loss and operating cost.

Other:-

The company also aims to de-materialize its entire share. Currently 98.55% of company total

shares were held in dematerialized format. Rest was held in physical format. It also aims to keep

the dilution of control to minimum.

The company aims to become the fifth largest oil company in world through. The past five years

trend shows that company is trying to attain debt to equity ratio of 70:30.


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TRIPLE BOTTOMLINE OF COMPANY:

Profit

The company revenue has been constantly increasing and increased by 25 percent in the last

financial year. Profit has been positive for the last 2 year. Thus the company has not issued any

dividend for the last few years. There was sudden increase in revenue in 2008-09 due to

acquisition it has carried out.

Year Revenue Revenue%Growth PAT

2006-07 470.17 -26% -55.58

2007-08 651.93 39% -41.18

2008-09 41,855.97 6320% -513.51

2009-10 42402 1% 29.46

2010-11 53119 25% 653.88

-600

-400

-200

0

200

400

600

800

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

PAT

PAT


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People

Education

They work with around 10,000 students in 55 primary, secondary and higher secondary schools.

These students are trained to play an active role in their communities.

Health

Approximately 40,000 patients received free diagnosis and medicines from two mobile medical

vans in 15 villages. 24 hours community health centre, mobile clinic, mother & child care and

OPD centers are operated for improving the health care facilities in the villagers surrounding the

Refinery at Jamnagar.

Entrepreneurship

The Company provided employment to more than 4,000 people from its surroundingcommunities. Training courses to create income generation opportunities for women were also

initiated.

Drinking Water

17,000 tankers provided more than 75,000,000 litres of water to 14 villages

0

10000

20000

30000

40000

50000

60000

2006-07 2007-08 2008-09 2009-10 2010-11

Revenue

Revenue


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Employees

Company has paid attention to upgradation of talent and skills in the refinery staff and

management as well as enhancing the management systems.

Planet

The Lost Time Injury Frequency Rate(LTIFR) is a constant focus area management. As of

March 31,2011 Vadinar refinery had recorded 1,094 days operations without a Lost Time

Injury. With a view to produce green fuels, appropriate technologies have been selected from the

reputed process vendors. Adequate care has been taken for production of Euro III / Euro IV

standard products while minimizing operating cost.

Environment

Plantation drives are regularly conducted at manufacturing locations to negate the environmental

impact of our operations. They have begun GHG accounting as per the American Petroleum

Institute (API) compendium GHG Protocol for Oil and Gas Sector and IPIECA Guidelines - to

measure the carbon footprint of our operations in Vadinar. Simultaneously Essar Oil has been

investing in Clean Development Mechanism (CDM) projects for the last few years. They have

one CDM project registered at UNFCCC while seven other CDM projects are in the pipeline

with a total estimated reduction of the order of about 1 million tonnes of CO2.


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CAPITAL EXPENDITURE:

Asset Turnover Analysis:

As can be seen from the graph, the gross and net assets at Essar Oil have consistently increased

from the period starting March07 till the period ending March 11The steep rise between the

period March 08 and March 09 can be attributed to the acquiring of fixed assets like plant and

machinery, as shown in the following schedule of the 2008-09 Annual Report of Essar Oil.

Mar ' 11 Mar ' 10 Mar ' 09

Mar '

08

Mar '

07

Gross Assets 13,974.59 13,802.50 13,364.74 551.68 303.86

Net Assets 11,744.09 12,309.35 12,605.84 430.08 196.27

Depriciation 2,230.50 1,493.15 758.9 121.6 107.59

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07


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Financial Ratios:

1) Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio

measures the efficiency and profit earning capacity of the concern

Fixed Assets Turnover Ratio = Cost of Sales / Net Fixed Assets

2) Total assets turnover, it measures the ability of a company to use its assets to generate

sales. The total asset turnover ratio considers all assets including fixed assets, like plant and

equipment, as well as inventory and accounts receivable

Total Assets Turnover Ratio = Net Sales/Total Assets

The steep rise in the total assets turnover ratio in the 2008-09 period is owing to increase net

sales from Rs 651.93 Cr to Rs 38,094.35 Cr which is a whopping 5743.33% .The increase in

total assets was meager (48.76%) doesnt cover the increase in net sales and thus the steep rise in

total assets turnover ratio.

Fixed AssetsTurnover Ratio

3.44 2.71 2.86 1.06 0.05

Mar11 Mar10 Mar09 Mar08 Mar07

Total AssetsTurnover Ratio 2.28 2.49 2.81 0.04 0.04

Mar11 Mar10 Mar09 Mar08 Mar07


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CAPEX DURING THE PAST 5 YEARS:

y The above graph shows the cash flow in investment activities during the last 5 years.

y The ve values depict outflow of cash as the company has been spending money to

acquire fixed assets.

y The company has been investing heavily in buying fixed assets every year, thereby

strengthening its processing capabilities.

The company has been on an expansion spree through mergers and acquisitions and thereby huge

investments are being done by the company year after year.

CAPITALSTRUCTURE:

A mix of a company's long-term debt, specific short-term debt, common equity and preferred

equity. The capital structure is how a firm finances its overall operations and growth by using

different sources of funds. Debt comes in the form of bond issues or long-term notes payable,

while equity is classified as common stock, preferred stock or retained earnings. Short-term debt

such as working capital requirements is also considered to be part of the capital structure.

A healthy proportion of equity capital, as opposed to debt capital, in a company's capital

structure is an indication of financial fitness.

-7000

-6000

-5000

-4000

-3000

-2000

-1000

0

2007 2008 2009 2010 2011

cash flow

cash flow


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y Debt Equity ratio

Mar 11 Mar 10 Mar 09 Mar 08 Mar 07

Debt/Equity 2.23 2.94 2.87 2.90 2.86

The company has a high Debt/Equity ratio hovering in the range of 2-3 as compared to the

industry ratio of around 1.17. Last year it was reduced significantly by .7%. Thanks to the

premium of around Rs. 2,200 crore it got on the issuance of GDS last year. This has helped them

to lower their Debt/Equity ratio last year. Furthermore whenever the company has opted for debt

to finance its growth, it has injected equity into the market to maintain the debt equity ratio atcontrollable levels. The company currently has a paid up capital of Rs. 1365.67 crores while its

authorized capital stands at Rs. 5000 crores. Thus the company still can raise equity worth Rs

3600 crore. The company should try and reduce its debt-equity ratio as the oil industry is very

unstable and thus to sustain in long run, the company should lower its dependence on debt to

meet the industry standards.

y Interest Coverage ratio

Mar 11 Mar 10 Mar 09 Mar 08 Mar 07

Interest

Coverage

2.16 0.63 2.29 -10.44 -9.38

In the last 5 years company has been on an expansion spree acquiring two major refineries,

thereby leading to an increase in its sales and gross profits. This has helped the company

improve its interest coverage ratio significantly. Till 2008 company was a loss making unit,

incurring huge losses and was not even able to make its interest payments. But since then the


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companys revenues has increased 80 times mainly due to increased throughput and higher oil

process. This has led to improve its ability to not only pay interests, but also make a healthy

profit.

SOURCE OFFUNDING:

YearOutstanding

GDSIssued

GDSFCCB

Issued

2006-07 5,126,708 0 0

2007-08 5,350,414 223,706 0

2008-09 5,531,930 181,516 0

2009-10 5,531,930 0 0

2010-11 6,604,724 1,072,794 $262Million*1 GDS = 153

Share

Company has been raising fund through GDS route for the past % years. Last Year it has raised

fund through FCCB amounting to a total of $262Million.

y COST OF FUNDING

Cost of Debt = Interest ( 1-Tax Rate)

Kd (1- Tax Rate)

Tax Rate = 19.6 % from 2010-11 which is round about the income tax rate applicable

to the Oil companies.

Debt (in crores) for 5 previous years:2010-11 2009-10 2008-09 2007-08 2006-07

14,546.93 10,353.73 10,031.71 10,015.59 8,571.44

Interest paid (in crores) for 5 previous years2010-11 2009-10 2008-09 2007-08 2006-07

1,220.24 1,180.93 1,091.48 6.06 10.65

Overall Rate of Interest (in %) for 5 years


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8.38% 11.4% 11% - -

After observing the overall Rate of interest of the recent 3 years we can say that on an average

the rate of interest (Kd) = 10.3%. After going through the 2007 and 2008 years the interests are

very low which means EBITDA for 2007= -39.39 crores and EBITDA for 2008 = -35.48 crores,which indicates that the company was not in a position of paying of all its Finance charges or

the interests.

So, The Cost of Debt = 10.3%( 1-.20)

= 8.24%

Analysis:

A high debt burden still remains a key concern for Essar Oil which paid a steep Rs 1,214 crore

towards interest in FY11.Also in the initial years of 2007-08 it mounted losses as a result it could

not service its debt. Also its Interest Coverage Ratios were poor around (-9.38)in 2007 and (-

10.44)in 2008.

Still, its current debt-equity ratio at the end of FY11 was the best in the last 10 years. Essar Oil

is now trying to raise $1.5 billion in external commercial borrowings to reduce its interest burden

as the cost of external borrowings is less than the cost of domestic borrowings.

A key positive for the company all along has been the tax benefits it enjoys. Essar Oil is eligible

for sales tax deferral benefit worth $1.8 billion by August 2020 and a seven-year income tax

holiday under section 80-IB of the Income Tax Act.

Cost of Equity

Cost of Equity: By CAPM (Capital Asset Pricing Model)

Ke= Rf + beta*( Rm-Rf )

Beta= 0.61 for Essar Oil

Rm = 15.3% (Return on Equity ) for the Oil Industry

Rf = 8% of risk free rate of return


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Ke = 8 + 0.61*(15.3- 8)

= 12.453%

Analysis:

The Capital Asset Pricing Model (CAPM) has been used to calculate the Cost of equity. The

Beta Value of the Essar Oil Company is 0.61 which means that this is a defensive stock and it is

always behind the market.

The company has been following an average Debt-Equity ratio of 70:30

Wd = 0.70

We = 0.30

Ko = Wd*Kd + We*Ke

= 0.70*8.24 + 0.30 * 12.453

= 9.50 %

Reported Net Profit for last five years (in Rs. Cr.)

2010-11 2009-10 2008-09 2007-08 2006-07653.88 29.46 -513.51 -41.18 -67.49

Average Reported Net Profit = 12.23 Crores

Total Shareholder Funds for last five years (in Rs. Cr.)

2010-11 2009-10 2008-09 2007-08 2006-076,537.90 4,673.65 3,582.01 3,600.72 2,995.13

Average Total Shareholder Fund = 4277.72 Crores

Therefore, Actual Return on Equity for last five years has been = (12.23/4277.72) *100= 0.30 %

Since, the company has posted losses in previous 3 years and has made positive net profits for

recent two years, this indicates that due to poor performance of late, the Actual Return on Equity


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is far less than expected cost of equity. The company is unable to give expected returns to its

shareholders and investors?

POLICYSTATEMENT REGARDING CAPEX

The companys board has given an in-principle approval to explore possibilities of raising

foreign currency loans to the extent of $1.5 billion, instead of rupee loans, for its ongoing

projects, said chairman Shashi Ruia at the companys 21st annual general meeting at Jamnagar

in Gujarat on 14th August, 2011.

CAPEX Decisions:

y Commissioning of the CDU/VDU, the primary units of the refinery project in November

2006. making the company a fully integrated 360-degree oil and gas major.

y Commenced production of crude oil in the Mehsana fields.

y Seismic surveys in our Myanmar blocks and drilling activities are currently in progress.

Your company has undertaken drilling of core wells in Raniganj.

y The second and third phases of capacity expansion will equip the refinery to manage high

levels of complexity and technology and bring it on par with the most modern refineries

currently in operation


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REFERENCES:1. http://articles.economictimes.indiatimes.com/2011-07-12/news/29765455_1_sales-tax-

deferral-benefit-profit-margins-essar-oil

2. http://www.moneycontrol.com/financials/essaroi

3. http://biz.yahoo.com/ic/122.html

4. http://www.nseindia.com/content/indices/Eind_betavalues.htm

Financial Objective of the Firm

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