The share price of Essar Energy fell sharply after the India-focused energy conglomerate revealed that the loss of a deferred sales tax case in India's Supreme Court had continued to weigh down on headline figures in the current calendar year. January's legal reversal resulted in Essar toppling out of the FTSE 100 Index, and forced it to book a $1.14bn (£733m) provision in the balance sheet to cover potential liabilities. The re-jigged numbers for Essar's new March year-end are in line with analysts' estimates, and management will be hoping that attention will now refocus on the company's impressive revenue growth. However, the market is likely to remain wary until the group resolves a number of existing operational and finance issues, including the renegotiation of its original $1.7bn corporate debt restructuring facility.
Admittedly, since we covered Essar in February, there has been progress in two key areas. In May, a governmental committee provisionally cleared the company to begin coal mining at its 1,200 megawatt (MW) Mahan power project in the Indian state of Madhya Pradesh. The project now awaits final clearance from central government in Delhi, although this, in itself, would not remove all of the uncertainties surrounding the provision of fuel sources for Essar's power stations.
In addition, the phase 1 expansion of the company's flagship Vadinar refinery in Gujarat was completed during the first quarter, while a subsequent optimisation project was signed off in June – four months ahead of schedule. Following this upgrade, the bulk of Vadinar's exports will be 'high-complexity' refined products, which "will permit a step change in margins", according to Essar's chief executive, Naresh Nayyar.
Improving margins aside, first-half earnings are likely to be held in check by the ongoing weakness of the rupee against the greenback. Depreciation in the 15-month period to March contributed to a $317m negative foreign exchange hit for Essar, and the slide has continued in the second quarter of this year due to a marked deterioration in India's balance of payments.
Broker BoA/Merrill Lynch estimates a share value of 265p for Essar, based on a combination of DCF and SOTP metrics.
| ESSAR ENERGY (ESSR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 120p | MARKET VALUE: | £1.57bn | |
| TOUCH: | 120-121p | 12-MONTH HIGH: | 427p | LOW: 100p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE | 264¢ | NET DEBT: | 192% | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 7.02 | 0.29 | 17.0 | nil |
| 2010 | 10.0 | 0.37 | 17.1 | nil |
| to 31 Mar | ||||
| 2011* | 21.96 | -1.15 | -53.0 | nil |
| % change | +119 | - | - | - |
£1 = $1.556 *15-month period | ||||
