Essar Oil – Winner from Ruias

Finally we have something from the House of Ruias for Indian investor that is worth mentioning. IDFC-SSKI / Sharekhan has initiated coverage on Essar Oil Ltd with a BUY rating.

Essar Oil (EOL) is on its way to becoming a vertically integrated oil company with significant presence in E&P, large presence in refining and a commensurate marketing infrastructure. A timely investment in expanding its refining capacity by ~3x to 34m tonnes and upgrading its complexity to take advantage of the global tightness in refining would be the biggest value creator for the company.

Given the tight supply, EOL’s capacity expansion (3x by 2010E) and complexity upgradation from 6.1 to 12.8 (among the top 5% globally) come at an opportune time. The superior refinery configuration would enable EOL to leverage the emerging complex refining environment. Also, EOL has surmounted funding issues, which had earlier led to a long delay in commissioning of the existing 10.5m tpa refinery.

EOL holds two development and 10 exploration blocks, five of them overseas. Reserves stand at a modest 80.5m boe of oil in Ratna R series.

Essar Oil is expected to report an EPS of Rs 3.6 for FY2009 and Rs 5.7 for FY2010. SSKI has set a 2 year price target of Rs 414 / share on Essar Oil Ltd.