<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>Edward Murphy would not be surprised. Everything that could have possibly gone wrong for Essar Oil in its wrangling with the Gujarat government over a Rs 6,300-crore tax dispute has gone wrong. The latest blow being the seizure of some of its bank accounts by the state last week.<br><br>At the heart of the dispute is the company's poster project, its refinery at Vadinar, Gujarat, newly spruced up to refine 20 million metric tonnes (mmt) of crude oil annually; and a 1995 state government sales tax incentive scheme. The state claims that Essar Oil did not meet the conditions as the refinery was not operational by the stipulated time limit of August 2003 (commercial production started in 2008). Early this year, the Supreme Court ruled that Essar Oil was not eligible for the scheme, which left it with Rs 6,300 crore of dues, payable immediately. <br><br>Adding salt to its wounds, the government demanded interest on the delayed payment, taking the total sum owed to over Rs 8,000 crore. This, for a company that made a profit of just Rs 400 crore last year from its normal operations. For the December quarter, it reported a loss of Rs 3,986 crore after it wrote off the tax part of the claim as loss as per accounting standards. That still leaves Rs 1,700 crore in interest claims, which will have to be written off in the current quarter. Predictably, the company's stock fell 30 per cent at one point of time before recovering about 18 per cent since the day of the Supreme Court verdict. <br><br>The scheme allowed a company to retain the money collected as sales tax for 17 years. Essar Oil claims that it relied on a 2008 Gujarat High Court verdict that ruled it eligible, and that since the funds were invested in the project in the intervening period, it could not cough up the amount immediately.<br><br></p>
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<p>Efforts to reduce the immediate cash outgo have been met with a stoic refusal by the government. The company wants the interest to be waived, and the principal repayment staggered over eight years beginning April 2013.<br><br>The company knocked on the Gujarat High Court's door, only to be reprimanded for filing an "absolutely misconceived petition". The court took the view that as per the scheme, the company was supposed to invest the incentive in another project in the state, and not expand the same project (at the time of going to press, Essar Oil is locked in renewed negotiations with the state government).<br><br>Meanwhile, in February, a claim of Rs 3,013 crore against United India Assurance for loss of profits in the aftermath of the 1998 cyclone was turned down by an arbitration tribunal.<br><br></p>
<p><strong>Silver Lining?</strong><br>At stake is the Rs 25,000-crore refinery, which the company claims is the second most advanced in Asia after Reliance Industries (RIL), at a complexity of 11.8 as per the Nelson Complexity Index. A higher complexity allows Essar to refine heavier (and thereby, cheaper) varieties of crude oil, thus improving margins to almost the levels at which RIL operates. The refinery was recently ramped up to refine 20 mmt annually, up from around 14 million in March.<br><br></p>
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<p>This fact gives analysts comfort. Alok Deshpande, research analyst at Elara Capital, says the upgraded refinery can deliver on the operational front, and that the challenge would be to ensure that the exceptional items like the sales tax outgo are managed smoothly.<br><br></p>
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<td><span style="color: #000080;"><strong>"We are confident that lenders will extend the credit" </strong></span><br><span style="color: #808080;"><strong>L.K. Gupta, CEO, Essar Oil</strong></span></td>
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<p>Goldman Sachs, in a report dated 4 May 2012, estimates that beginning this year, Essar Oil will be able to clock operational profits of over Rs 4,500 crore. That would still leave some money for shareholders after interest payment of up to Rs 2,500 crore. But here the assumption is that the company will be able to raise the funds to pay off the liability immediately.<br><br>Essar Oil is in a tight spot. Its current debt of over Rs 13,000 crore mean it is leveraged almost four times. But debt is still its best option. With promoter holding at just under 90 per cent, fresh infusion of funds by promoters is not possible as public shareholding in listed companies has to be at least 10 per cent. <br><br>While the company has announced an equity fund-raising of around Rs 3,000 crore, it admits that the process could take 12-15 months. Will it be able to convince lenders that it is worthy of additional funds? Lalit Kumar Gupta, Essar Oil's CEO, seems confident. "We have conveyed to our lenders that we may approach them for further funds, and we are confident that they will extend the credit." His optimism stems from the fact that the refinery is up and running, and will generate cash flows. He argues that if his lenders supported the company when the going was tough, why would they pull the plug when the future seems more certain. <br><br>But what of Murphy's Law — if anything can go wrong, it will?<br><br>abraham (dot)mathews (at)abp (dot)in<br><br>(This story was published in Businessworld Issue Dated 23-07-2012)</p>