Essar Oil – Is it over valued?

It is very tough to value a company that does not have earnings to show currently and that goes into production much later. Added to that, the underlying, in this case the Oil, is seeing huge volatility. I attempt to compare two apples that are in the same dilemma.

Before looking at valuations, lets look at some figures. At status quo, Essar Oil is going to produce 0.21 mn barrel per day compared to 0.58 mbpd of RPL. The Nelson complexity of Essar Oil is 12 compared to 14 of that of RPL. With these figures: The EV of Essar Oil is 10,000 cr vs 28,000 cr of RPL; The EV/bpd of Essar Oil is $46,700 vs $48,000 of RPL; The EV/comp bpd of Essar Oil is $3900 vs $3430 of RPL. The above stats indicate that Essar Oil at stock price of Rs 270 is valued at par if not more than RPL.

However, if you consider the statements made by the Essar Oil promoters, the situation becomes complex. Promoters are pumping in $2bn at a stock price of Rs 200 and will further raise $4bn to triple the capacity from 10.5 to 34 mn metric tons per annum. This additional capacity will be at a better Nelson complexity taking the overall complexity to 12.8 and entire capacity will kick in only in 2010. Based on these estimates, the EV/bpd of Essar Oil is $14,800 vs $48,000 of RPL; the EV/comp bpd of Essar Oil is $1160 vs $3430 of RPL. The numbers make Essar Oil look definitely cheap compared to RPL and a reasonable logic for the stock to flare up 17%-20% day after day. So, it basically depends on how much information one would want to discount.