Essar turns up the power

Essar Energy is a diversified play on India's growing and largely unmet power demand. It has released a positive maiden set of results following its flotation in May.

India's gross domestic product grew at 8.6 per cent in the first quarter of 2010, despite the gradual withdrawal of fiscal stimulus. Yet India continues to experience large and consistent power shortfalls, which are set to continue for the foreseeable future. India imports around 80 to 85 per cent of its crude oil, and looks set to continue to do so despite significant recent discoveries of both oil and gas.

Around 90 per cent of Essar's revenues currently derive from low-cost refining and marketing of oil with most of the balance generated by its four power stations that together produce some 1,220 megawatts. Essar's growth plans see power output increasing to 11,470 megawatts by 2014, which should see this division contribute half of group revenues in that year, with refining contributing 45 per cent and a small but growing contribution from oil exploration and production.

J.P. Morgan Cazenove says...

Overweight. Operating result was in-line with consensus and overall this was a confident and reassuring message from the company especially on the status of the key expansion projects. Positives: All Phase I power generation projects are on schedule and budget; good progress being made on the Phase II power projects; refining throughput above 100 per cent and start date for refining expansion remains March 2011. Negatives: Three to six-month delay in the captive mining projects, but financial impact is not expected to be material. We believe that the recent pullback in the stock is unwarranted - Essar continues to make good progress on the execution of its expansion projects.

Deutsche Bank says...

Buy. Numbers were in-line. On coal mines, Essar has seen some delays on gaining forest approvals, as has been the case recently across India, although it was recently visited by an expert group of ministers, which have recommended to expedite the approval process - a positive step. Even in the case of a modest delay to its own production, the company believes it can substitute this with coal from Coal India and does not expect to face any material financial impact. The company is on-track to deliver commercial sales from one of its coal bed methane projects in the fourth quarter, as planned, and has been allocated more coal bed methane acreage in recent months. Expect full-year EPS of 11¢ (7p) a share, rising to 40¢ in 2011.