L&T stuns St, says competition hot as orders vanish

This story first appeared in DNA Money edition on Saturday October 22, 2011.

Larsen & Toubro (L&T) on Friday cut its order growth guidance to 5% from the 15% it had envisaged at the beginning of this fiscal, citing a slowdown in investment momentum and cut-throat competition for orders.

R Shankar Raman, chief financial officer, L&T said the reassessment was necessitated as decisions related to new projects were being deferred. “At the moment, our best guess is that the conditions are going to remain as challenging as they are today and it is quite likely that the growth will be around 5% rather than the targeted 15% earlier,” he said.

The engineering and construction industry has seen considerable slowdown in investment momentum in the last 6-8 months.
Adding to the troubles is the competitive business environment wherein fewer projects are coming up and as such are being fiercely fought for.

“As a result, win rates are dropping for all the participants in the sector and L&T is no exception. Considering this situation and the policy initiatives that are required to be taken to fast-track some of these investment programmes and the confidence that has to be re-found in the business community, we do think we will lose much of the remaining six months in this process of discovery,” said Raman.

As for the engineering and construction behemoth’s revenue growth outlook of 25% for this fiscal, the management said revenue visibility was better than accretion in the order pipeline since 82% of its revenues came from the order backlog.

“Our assessment tells that we should be able to maintain the guidance in so far as the revenue is concerned. The 15-18% of fresh orders that we were banking on to be able to get the revenues up to its full 100% level, despite the correction in the order inflow that we are accessing today, we think should survive. Hence, our assessment now is that the revenue guidance should stay,” said Raman.

For the quarter ended September, the management said new orders fell 21% to `16,096 crore while the total order book was at Rs142,185 crore. Net sales for the quarter were up 19.3% at Rs11,245 crore, while net profit rose 15% to Rs798 crore, including extraordinary gains of `70.8 crore from sale of shares in Mahindra Satyam.

Finally, tipping point for cable TV

This story first appeared in DNA Money edition on Friday October 14, 2011.

A paradigm shift is nigh for India’s television distribution industry, where for years unscrupulous local cable operators have under-declared subscriptions, causing huge revenue losses to broadcasters and platforms.

Over the last five years, while direct-to-home (DTH) has flourished in an environment of voluntary digitisation with around 35 million subscribers, digital cable has stayed laggard.

“The pain in digital cable has only further intensified in the last 9-12 months, when multi-system operators (MSOs) such as DEN and Hathway have added less than 0.5 million subscribers in spite of being adequately capitalised. The ‘hope’ of the regulatory support was a critical reason for this delay,” said Nikhil Vohra, managing director, IDFC Securities Ltd.
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Interestingly, of the 225 million-or-so households in the country, an estimated 20 million are in the metros covered in Phase-I of the digitisation ordinance issued on Thursday.

The rural skew also shows in the DTH pie, with only 9 million out of a total 35 million subscribers from urban areas.

Among other players, Dish TV is expected to extract a sizeable pie from the metros in a mandatory digital environment. Nationalised MSOs such as Wire and Wireless (WWIL), DEN and Hathway are also likely to see sharp increases in their delta gains.

Dish and WWIL are Zee Group companies, which also co-owns Diligent Media Corporation, which publishes the DNA.

“Against a backdrop of extremely poor execution and muted subscriber addition of less than 0.5 million subscribers annually, we now foresee a near three-times jump in digital subscriber addition in the next 12-18 months. This will ensure a sticky base for MSOs ready to monetise,” said Vohra.

“It’s not that companies were not investing into the business earlier,” said, Smita Jha, consulting head - entertainment and media, PwC. “They never had a say as the end-user was free to choose between analog and digital cable, which will not be the case now thanks to mandatory digitisation with defined timelines,” she said.

Locals forced to digitise; better Arpus
Local cable operators (LCOs), which had limited incentive to digitise or partner with MSOs earlier, will now be compelled to undertake digitisation.

“With limited access to capital as also ability to digitise their own network, LCOs are now bound to partner with MSOs. This, coupled with digitisation with addressability, will lead to addressal of the biggest bane in the cable distribution industry — under-declaration (of subscribers),” said Vohra.

Both DTH and digital cable operators will benefit as DTH companies were earlier competing with analog cable operators owing to lower average revenue per user (Arpu) on cable networks. “The Arpu was in the Rs 100-200 range. As a result, DTH companies could not increase their prices. Digitisation would lead to an increase in cable operator and DTH Arpus. It’s a win-win for everyone. While set-top box prices at Rs 1,000-1,200 may look on the higher side in case of digital cable, these prices are declining and will come down further in the coming years. This will be a key factor for digital cable operators looking to grab market share in non-metros, the deadline for which has been set for 2013 and 2014,” said Jha.

Consolidation ahead
Once the key metros get digitised, there will be some amount of transparency in the market in terms of revenue declaration, which will instill confidence in the investor community to participate in the fundraising plans of various players in the industry.

Keeping in mind the funding requirement, a proposal to increase foreign direct investment (FDI) limit in the C&S industry has been mooted already. Once the Cabinet approves a hike in FDI limit to 74% from the current 49%, experts feel it will lead to realignment of the cable and satellite business, spurring mergers & acquisitions.

From a consumer perspective, digitisation will make cable more competitive vis-a-vis DTH.

Now order a pizza on cable
For one, cable would have an interactive two-way communication system and hence a lot of value added services (VAS) which are not possible on DTH.

How about ordering a pizza over cable and receiving a confirmation from the pizza guy, for instance?

There would also be other VAS offerings like digital video recorder, pay per view, broadband internet and IPTV, bringing cable on par with DTH.

The monthly outgo, in addition to purchasing set top box, is likely to remain the same for a bulk of consumers, though it could be higher for those opting for expensive pay channels.
To a large degree, therefore, it will come down to quality of picture and programming, availability of channels, value-added services and of course pricing of the services which is key driver in a country like India.

More capital needed
On the flipside, for the cable operators, the mandatory digitisation will increase the capital requirements.

According to Jehil Thakkar, head media and entertainment practice, KPMG, all the cable companies will now have to think about where the funds are going to come from —- internal accruals, fund raising or take on debt, etc.

“We have estimated overall capex (entire infrastructure cost including set top box and optical fibre cable) for the industry to be around Rs 20,000 crore in the next 3-4 years. Given the state of the market, companies will have to raise money either through private equity or debt while some of the public ones can explore market-based options,” said Thakkar.

Interestingly, while DTH players like Dish TV and Reliance TV already have separate entities —- Wire and Wireless and Digicable, respectively —- to address the cable TV market, there is a possibility of other players also adding cable operations to their business. “This approach will broaden their offerings for the different geographies/ markets in addition to building on the competitive advantage. This could happen through both organic and inorganic routes,” said Thakkar.

Players cheer
Dish TV has hailed the move as a positive one. “This ordinance will certainly help the DTH industry much more than other forms of distribution,” said Salil Kapoor, COO, Dish TV India, adding that DTH has emerged as the platform of choice across all population and socio-economic strata.

According to Sudhir Agarwal, CEO, WWIL, the entire cable TV universe will be converted to digital homes, thus reducing under reporting, bringing in transparency and resulting into boost in subscription revenue.

“Digitisation of existing cable infrastructure will augment the channel carrying capacity, offer better quality and will provide further scope for delivering various value added services. A multi-fold increase in subscriber number is expected. Such exponential growth in subscriber numbers requires huge infrastructure to serve them as well, for which WWIL is well positioned.

M G Azhar, president - strategy and business development, DEN Networks Ltd, feels the initiative will create a paradigm shift in the pay distribution industry and alter the fundamentals of the media sector. “The transition will see the entry of more channels, the spread of broadband and triple play offerings and ultimately a transformation in how households consume content and entertainment in this country,” he said.

Harit Nagpal, CEO, Tata Sky, said it will help transform the sector into an organised industry. “It will aid the organisation of the Industry and result in clearer subscription figures for broadcasters,” he said.

Cabinet nod for full digitisation of cable services

This story first appeared in DNA Money edition on Friday October 14, 2011.

Cable television services in towns and cities across the country will go completely digital in the next three years, the government said on Thursday. The cabinet committee of economic affairs has cleared a proposal for digitisation of cable services in all metros by 2012 and other urban areas by 2014, information and broadcasting (I&B) minister Ambika Soni said.

At present, while there are several direct-to-home and multi-system operators in the urban areas, analog systems also abound, leading to issues of transparency and control.

The ordinance will allow the I&B ministry to insert a clause in section 4A of Cable Act, thereby making a digital addressable system mandatory in the cable sector. This will have to be done in four phases as recommended by the I&B ministry and the Telecom Regulatory Authority of India.

"Cable operators will have to abandon analog in the four metros by March 31, 2012. Cities with a population of one million will be covered by March 31, 2013. All urban areas would be covered by September 30, 2014. The entire country will be covered by December 31, 2014," said Soni.

The ordinance will now pass through the law ministry to the president for a final signature, post which it would be ratified by Parliament within six months.

The cable and satellite television industry has hailed the initiative as a game-changer.

Mandatory digitisation is expected to reduce revenue leakage in the system where the level of under-declaration of subscribers and revenues is said to be as high as 80%. With compulsory digitisation, errant operators can no longer fake the numbers.

Experts feel the initiative is a win-win across the value chain. Cable operators benefit as capacity constraints are removed and they are able to offer more channels by going digital, thereby boosting subscription revenues.

Additionally, they get to offer a host of value added services such as movie-on-demand, electronic programming guide, internet and high-definition channels as additional revenue streams.

For the broadcasters, on the other hand, the initiative means a reduction in the carriage fees they need to pay cable operators to ensure their channels are beamed in a certain locality.

As for the end-consumer, there is an assurance of greater variety and better quality of content. Indeed, it is likely there would be an explosion of channels as even niche plays become viable.

WNS lines up FPO, most likely to facilitate Warburg’s exit

This story first appeared in DNA Money edition on Thursday October 13, 2011.

WNS, the New York Stock Exchange-listed business process outsourcer, has filed a shelf registration statement with the Securities and Exchange Commission (SEC) to offer and sell up to $50 million of ordinary shares/ American depositary shares (ADS).

That could give private equity major Warburg Pincus a chance to exit its majority shareholding in the company.

The sale could be done in one or more offerings, WNS said in a statement.

Shelf registration is a regulation that a corporation can evoke to comply with SEC requirements for a new stock offering up to three years before doing the actual public offering.

Vishal Mahadevia and Niten Malhan, managing directors at Warburg Pincus India, were not available for a comment. “The firm is bound by internal operational policies, which does not allow discussion of its investment activities. Warburg Pincus is unable to share any views regarding your queries,” a spokesperson responded.

Parth Iyengar, head of research, Gartner India, said the move may not necessarily be indicative of the private equity firm’s exit from WNS. He said economic instability in western world may be forcing Warburg Pincus to look at monetising its stake in the BPO firm. “It must be concerned about the economic instability and so must be considering monetisation some of its shareholding in WNS before its value depreciates more.”

Generally, when an investor is looking to exit a venture the shelf registration is for offloading of major stakeholding and in a trickle like it was in the case of WNS, said Iyengar.

Once approved by the SEC, the shelf would allow Warburg Pincus, which is the largest shareholder in WNS holding 48% as of June 30, 2011, to offer and sell up to 2.14 crore ordinary shares or ADSs.

It will be up to the private equity firm to exit its entire holding in the company through one or more offerings.

WNS will not receive any proceeds from the sale by Warburg Pincus.

Keshav Murugesh, group chief executive officer, WNS, did not give away specifics related Warburg’s exit plans.

“The shelf will provide us the flexibility to sell shares as and when required to achieve our strategic objectives and fund our growth plans including capital expenditures, acquisitions and other investments in the business,” was all he conceded.

Interestingly, Warburg has been trying to exit its investment in WNS for a while now, but wasn’t able to, because of disagreement with the WNS management over the exit approach.

According to media reports, WNS was favouring Genpact, which was one of the largest bidders in a stake sale exercise conducted in the last quarter of 2009.

However, Genpact’s bid was in the form of stock and not cash while the PE firm (Warburg Pincus) was looking at the highest bidders offering cash in favour of their investment.

Coming soon: The Bellagio and MGM Grand at Bandra-Kurla Complex

This story first appeared in DNA Money edition on Wednesday October 12, 2011.

Mukesh Ambani continues to make inroads into India’s hospitality sector — after taking a stake in East India Hotels of the Oberois. A special purpose company promoted by Ambani and South Mumbai realtor Maker Builders is setting up two hotels — a Bellagio and an MGM Grand — at Maker Maxity in Bandra-Kurla Complex.

The company has signed an agreement with MGM Hospitality to manage and run the hotels. The Las Vegas Bellagio is known for its dancing fountains and high-end luxury suites. Its promoters say they are keen to merge Mumbai’s personality in the Bandra Bellagio’s architecture.

MGM will also bring in Skylofts, which are serviced apartments. DNA Money had first reported Maker Maxity’s plans to bring in the Bellagio hotel in June last year. The hotels are expected to be operational in 3-4 years from the time work starts.

Gamal Aziz, CEO of MGM Hospitality, said the location’s proximity to the central business district, the entertainment industry and affluent residents provides a perfect setting for the confluence of energy, indulgence and luxury that the hotels will bring to the destination. “It is a huge milestone in our strategy to extend our brand reach in the Indian hospitality market,” he said.

Officials of the joint venture did not respond to DNA’s mail. Calls made to Rishi Kapoor, vice-president — India development, for MGM, remained unanswered.

Google India to bring 500,000 Indian Small Medium Businesses online for free

Google India launched a nationwide initiative to assist small medium businesses in India to get online with a free website, personalised domain and hosting. Called ‘India Get Your Business Online,’ this initiative aims to break down the barriers that stop small businesses from getting online -- by offering a quick, easy and free tool to set up and host a website.

With this initiative, Google intends to help 500,000 small medium businesses in India to get online in next three years, working with web hosting provider HostGator.

Small business owners in India can logon to www.indiagetonline.in and use the tool to get a get a free, easy-to-build website and web hosting for one year powered by HostGator. Businesses also get a customised domain .in name and free tools, training and resources to succeed online.

According to union rural development minister Jairam Ramesh, "SMEs are the future business leaders of India and their growth is a priority for the UPA government and its policies. We want to see India's SMEs grow to become recognized Indian brands, and a presence on the Internet is absolutely essential for this. I therefore welcome Google's initiative in launching India Get Your Business Online for SMEs. This will help SMEs modernize their operations and reach out to more customers in India and abroad. Indian SMEs should make the most of such opportunities to establish their presence on the Internet. I wish this initiative all success."

Highlighting Google’s commitment to India, Nikesh Arora SVP & Chief Business Officer of Google Inc. said, “Google has always believed in the power of the Internet to help small businesses thrive and to make people's lives easier by making information more accessible and useful. We recognise India as a high growth and high potential Internet market in the world and we’re committed to play the role of a catalyst to bring the benefits of the internet economy to small and medium businesses in India. We have received tremendous response to this initiative in other countries and we’re very excited to bring this initiative to India and empower local businesses as more and more Indian users get online.”

While India is home to an estimated 8 million small and medium businesses, only about 400,000 have a website. The initiative is designed to bridge the information gap that exists online due to the lack of presence of local Indian businesses on the Internet. Businesses often believe that getting online is too complex, costly and time-consuming; this perception prevents many SMBs from taking the first step towards building an online presence. Google India and HostGator plan to change that through this initiative. In addition, HostGator will also offer free support in creating, hosting and managing the website for a period of one year without any cost through its toll free call centers 1800-266-3000.

“Small and medium businesses have been an important focus area for us and we have launched a number of initiatives in India to support SMB’s who are already online. By partnering with HostGator we’re changing the game - our consumers will benefit from having access to better information of local businesses, business owners will benefit as their customers will be able to find them easily - so it’s a win-win proposition for both. We’re investing major resources in this campaign to help as many businesses as possible to get online. We aim to get at least 500,000 businesses online in the next three years,” said Rajan Anandan, managing director and VP sales and operations for Google India.

“SMBs form a very substantial part of our global customer base and we are committed to offer world class service to Indian SMBs. With Google, we have the perfect partner and we are very excited about the opportunity this represents for small and medium businesses in India. We will do our best to help out business in India build their online presence and also offer 24/7 support through our call center,” said Taylor Hawes, Marketing head of HostGator.com.

India get your business online program is also supported by Federation of Micro, Small and Medium Enterprises (MSMEs), popularly known as FISME. FISME, the non-profit organization will work with Google India to help SMBs get online through direct customer outreach and events.

V K Agarwal, president, FISME said, “With Google search being the most preferred search service on both the desktop and mobiles in India, this initiative of offering free domain, dynamic website and promotional tools, brings unparalleled advantage for small businesses in India. FISME with its network of 730 MSME associations will help the Indian Small businesses to make the most of this opportunity and benefit from this program. It is going to be a game changer.”

Details of www.Indiagetonline.in website creation tool:

● Free: It’s free to set up your website. The domain is free for 1 year, and it’s free to maintain your website for 12 months.

● Quick: The website tool takes 15 minutes from sitting down to being found online

● Easy: You don’t need to be a tech whiz to get started. All you need to start is your address, phone number, TAN/CIN or PAN to verify you as a business

● The website is simple because customers are looking for simple information online

● If you want to make your website work harder, you’ll have access to steady stream of free tips and tools from the Getting Indian Business Online team and a free coupon of worth Rs. 2500 INR advertising trial from Google AdWords to help promote your site.

● Gives you your own .in domain

● You get a Google Apps account - free personalized email ids

● Other features include photos/logos, integration with social media platforms

● After the first year, SMBs can choose to pay a monthly pay-as-you-go to maintain their website using HostGator.

● At the end of the first year, they’ll have to pay a nominal charge if they wish to renew their domain name. They can cancel their website at any time.

For PE firms, energy is a red-hot pick

This story first appeared in DNA Money edition on Saturday, October 8, 2011.

The energy sector has attracted maximum investments from the private equity players during July-September, the third quarter of calendar year 2011.

Of the $2.25 billion worth PE placements across 98 deals in Indian companies during the quarter, about $823 million, or 37%, was in 16 energy-sector companies, according to data by Chennai-based research firm Venture Intelligence.

Vikram Uttam Singh, head-private equity, KPMG, said, “We saw deals of close to $5 billion in the energy space last year and what is happening now is an extension of it. One of the reasons for this is that until recently very few deals of this size were available in the market. Power industry is very capital intensive and hence the deal sizes tend to be huge,” he said.

Among some of the largest investments in the quarter are The Blackstone Group-owned Sithe Global Power’s around Rs1,280 ($261 million) investment in SKS Chhattisgarh Power Generation, Blackstone’s direct Rs500 crore ($111 million) investment in Visa Power and Goldman Sachs’ Rs1,000 crore ($204 million) commitment to ReNew Wind Power.

Industry experts said that increased traction in the energy space is also because most companies are adopting the cluster approach to fundraising (seeking investments in multiple assets) as compared to a single asset approach earlier.

“If you look at fundraising done by players like GMR and Sumant Sinha’s ReNew Wind Power these are all cluster transactions,” Singh said.

Also, unfavourable primary market is another reason for promoters to turn to PE firms. Interestingly, despite bad market conditions, energy companies are getting fairly good valuations from PE firms, which is visible in the number of deals getting closed, an expert said.

“A non-conducive market environment generally tends to favour the PE companies owing to discounted valuations. However, from the current deal momentum, there appears to be meeting of minds between the investor and the investee over valuations, which is good for others looking to raise PE money,” said a top official from an international investment advisory firm.

According to a KPMG paper on power sector last year, India has the fifth largest generation capacity in the world with an installed capacity of 152 GW as on 30 September 2009, which is about 4% of global power generation.

A recent news agency report cited that India has a peak-hour power deficit of about 14% and that the renewable sector comprises 6% of the total power mix.

Among other sectors that topped the PE wishlist included information technology and IT-enabled services, which was the second largest sectors attracting $437 million across 29 transactions. SoftBank’s $200 million investment in mobile advertising network InMobi was the largest deal in this space, followed by the $40 million raised by online group buying service Snapdeal.com from Bessemer Ventures with participation from existing investors IndoUS Ventures and Nexus Venture. Also Blackstone invested about $33 million in financial inclusion-focused tech firm Fino.

Interest in infrastructure firms operating in the roads and water projects helped the engineering and construction industry attract $279 million in eight investments across companies such as Soma Enterprise, HCC Concessions and GVR Infra Projects.

However, the PE investment during the third quarter was lower than the same period last year ($2,357 million invested across 111 deals) and also the preceding quarter ($2,911 million across 122 deals).

We will help IIFL expand overseas: Carlyle MD Devinjit Singh

Devinjit Singh

This Q&A first appeared in DNA Money edition on Thursday, October 6, 2011.

Devinjit Singh, managing director, The Carlyle Group, speaks about the latest transaction and PE firm’s investment strategy going forward. Excerpts:

Could you tell us what really led to the investment in IIFL?
The big driver for us was the management as we have known them for sometime now. We were very impressed with what they have done. They have a leadership position in the retail brokerage side and have been able to attract team from the likes of CLSA and have launched into institutional brokerage segment. The company also has a leadership position in the insurance brokerage and wealth management space. What is equally importantly is that they are looking to transform themselves into a diversified financial services company. The IIFL management also felt this is an area we could help and add value to their business. That’s the key reason they have invited us to join the company board and support their growth plans. It was a meeting of minds in that sense.

How is Carlyle looking to benefit from this investment?
We like the sector a lot. We have an investment in HDFC and now in India Infoline. This gives us a broad exposure to the Indian consumer. We believe strongly in the overall India growth story and financial services sector is the best way to play. We will continue to deploy capital in the sector.

Are there any specific expectations from IIFL post this investment?
We are fully aligned in terms of their strategy and our role is really to support the management.

IIFL wants to explore international markets and sees the Carlyle association as a key catalyst...
They have entered the Singapore market where we have some presence. They have presence in Sri Lanka where we are not that strong yet. This apart, we will be helping them with their investor base which is largely international. Those are some of the areas where we will be of assistance to the company as far as overseas penetration is concerned.

What would be Carlyle’s investment horizon specifically with private investment in public enterprises (PIPEs)?
Our investment in HDFC was a PIPE and it’s over four years now. So give and take a few years here and there, we will look at a 5-7 year horizon for such investments.

What are your views on the recent development from the Sebi to regulate alternate investment funds?
It is very limiting in nature. Our investors give us money to find good deals. They don’t really care if the companies are listed or unlisted, infrastructure or non-infrastructure, minority or majority and so on. And at different points of time different deals become interesting, like you pointed out that the current market looks good for PIPEs. Similarly, there would be times when private deals would be better so we need that flexibility. And some of the points outlined by Sebi will make things very restrictive for our business.

What are your plans in India?
We are committed to our investment plan in India. We go through phases where we don’t invest at all, like the case has been in last couple of years. The reason being, we thought the framework wasn’t conducive to our investment. But now we do think that things are moving and if the right opportunity comes we will certainly be committed to making investments.

Carlyle picks up 9% in India Infoline

My colleague Sachin Mampatta co-authored this story, which first appeared in DNA Money edition on Thursday, October 6, 2011.

The Carlyle group, which manages Rs7.55 lakh crore worth assets globally, has picked up a 9% stake valued at Rs192 crore in brokerage and financial services firm India Infoline (IIFL).

The stake was picked up over the last few weeks from the open market, according to a Carlyle spokesperson. The private equity firm would get a seat on the board of the company, said a joint-note on the development.

“Carlyle becomes a key institutional shareholder in IIFL and will be invited to join IIFL’s board of directors to support its future development, subject to necessary approvals,” it said.

Talks of a stake sale to a foreign entity have been doing the rounds for over a year. IIFL chairman, Nirmal Jain, dismissed speculations of a total promoter sell-out, terming them “baseless”.

He said there was no change in the promoter shareholding. There have also been no discussions for any additional stake sale, although the Carlyle remains free to pick it from the open market, Jain said.

As per the current stock price, Carlyle’s 9% stake is worth Rs192.15 crore.

“We bought around 6.5% stake a few weeks ago and then increased it gradually to the current 9% levels,” said Devinjit Singh, managing director of The Carlyle Group.

IIFL said the acquisition would help it expand overseas.
“We hope to leverage our relationship with Carlyle to continuously grow and expand internationally,” said Jain.

The investment was made by Carlyle Mauritius Investment Advisors Ltd, a part of Carlyle Asia Partners, which has made investments including HDFC in India.

Carlyle has invested more than $2 billion (Rs10,000) in Asian financial services businesses.

The IIFL stock was up 1.95%, closing at Rs70.75 at the end of trade on Wednesday.

The Sensex, whose movements reflect the broader market trend, was down 0.46%, closing at 15792.41.

Essar Oil set to complete Vadinar Phase I spread by December

This story first appeared in DNA Money edition on Wednesday, October 5, 2011.

Essar Oil is all set to be the second-most complex refiner in India after Mukesh Ambani’s Reliance Industries.

Growing at a compounded annual growth rate of 27%, Essar Oil is targeting to build overall capacity of 711,000 barrels per day (bpd) by March 2012 and will enhance it to 7,41,000 bpd by March 2013.

Reliance currently boasts of 1.24 million barrels per day (bpd) of crude processing capacity, the largest at any single location in the world.

Naresh Nayyar, chief executive - Essar Energy and managing director - Essar Oil, was not available for comments.

However, responding to DNA queries on capacity addition, a company spokesperson said that new capacity in the current fiscal will come from completion of Phase I at Vadinar Refinery in Gujarat (75,000 bpd) and Stanlow refinery (296,000 bpd).
The Vadinar optimisation exercise will give it an additional 30,000 bpd to be achieved by March 2013.

The company’s Phase I expansion plans at the Vadinar Refinery in Gujarat is on track and is expected to be completed by December. According to the company spokesperson, this capacity addition is being made at an overall cost of `8,600 crore funded through a mix of debt and equity.

“Vadinar refinery Phase 1 expansion project will increase production to 375,000 barrels per stream day (bpsd) from 3,00,000 bpsd and, more importantly, increase complexity significantly. The increased complexity means that the refinery can increase the proportion of heavy and ultra-heavy crude that it processes, and produce a higher proportion of middle and light distillates,” the spokesperson said.

Analysts tracking the sector said the new capacity will make Essar Oil the second-most complex refiner in India.

Saurabh Handa and Garima Mishra, analysts with Citi Investment, Research and Analysis, in a recent company report, said, “Besides an approximately 30% increase in capacity, the expansion would also increase Essar’s complexity to 11.8 from 6.1 currently, making it the second-most complex refiner in India after RIL.”

Industry experts also believe that completion of the Phase I project expansion will be a key driver of superior gross refinery margin (GRM) and profitability going forward.

Dikshit Mittal, analyst - oil and gas, SBICap Securities, said that refining margins have been on an uptrend and current refining margins ($9/bbl) are close to three year high.

“Strength in refining margins has been higher, mainly owing to increased gasoline margins. However, going forward the margins are likely to witness some pressure as the market situation in the west especially the US is not looking very good. In case US slips into recession, refining margins may come off substantially next year,” said Mittal.

Another Citi analyst, Oscar Yee, sees a slight pullback in 2012 as refining demand and supply delta is likely to turn slightly negative next year, based on Citi’s revised global oil demand forecasts (+1mm b/d p.a. in 2011-12E).

The concerns over a global slowdown, according to Yee, would hurt Europe / US refiners more as industry utilisation in Asia would remain relatively stable at 83-84% in 2012-13.

“We expect the next cyclical downturn to arrive only in 2014-15 with Middle East and China greenfield projects starting up. Overall, we forecast regional GRMs to drop slightly by $0.5-1.0 in 2012,” said the Citi analysts.