A major upgrading of its refinery in Gujarat by Essar Oil should boost its margins by up to $5 a barrel, its chief executive said on Thursday, adding nearly three quarters of a billion dollars to its annual revenues.

Essar has just completed a $1.6 billion overhaul and expansion at the Vadinar refinery, raising capacity to around 360,000 barrels per day from 280,000 bpd and adding units that can process cheaper, heavier crude into fuels.

The refinery would reach 400,000 bpd capacity in September, managing director Lalit Kumar Gupta said.

"The difference in our margins and those in our neighbouring refinery, which is as complex as we are today, has been about $3 to $4/bbl. We should be able to bridge that gap now," Gupta told Reuters in an interview.

The refinery would gain another $1 a barrel in margins through using a coal-fired power plant to provide electricity, which would save on fuel costs, Gupta said.

Essar had earlier forecast a 35 per cent jump in revenues for the fiscal year that started on April 1. Revenues for the previous fiscal year were around $9.5 billion.

Essar plans to sell a stake of around 15 per cent by June 2013, as required by the Securities and Exchange Board of India (SEBI) to reduce the stake held by founding shareholders to 75 per cent from nearly 90 per cent now.

The company believes its shares are trading below value and the price will improve after investors see it operate the newly expanded refinery for two quarters, Gupta said.

That would be a better time for any stake sale, he added. Given the full expansion will be completed in September, that would push any possible stake-sell to close to the deadline.

"We will come to market when we are rightly priced. At the current price we think we are heavily undervalued. We see significant upside in our refinery business," Gupta said.

Essar Oil's market valuation stands at $1.3 billion and its shares have barely changed so far in 2012, closing on Thursday at Rs 50 a share, a fraction of the peak in 2008 of nearly Rs 356.

Essar, 87 per cent owned by London-listed Essar Energy is one of only two private refiners in India.

The other is Reliance Industries which operates the world's biggest refining complex at Jamnagar and has among the best margins in the industry.

Reliance reported gross refining margins of $7.60 a barrel for the March quarter, down from $9.20 a year ago.

MARGINS
Gupta said he expected refinery margins to rise in coming quarters as the northern hemisphere summer driving season demand kicked in and improved profits for making gasoline.

"Going forward, once the gasoline cracks are better, margins can only go up," he said. "Definitely complex refineries have to make more margins."

The company is currently negotiating with the government in Gujarat more time to repay a $1.24 billion sales tax due after the Supreme Court dismissed Essar's petition seeking a review of an earlier verdict to defer payment.

Essar, which has already booked a 40 billion rupees loss in its books for the tax liability, hopes to service repayments from the increased cashflows of its expanded refinery, but is also in talks with several banks to raise funds for the payment, Gupta said, but declined to name the banks.

"If the Gujarat government insists on some interest, to that extent our earnings will definitely get impacted. But going forward, we see strong cash flows and earnings, so we are not unduly worried," Gupta said.

Essar will be able to use heavy crude for almost 80 per cent of its capacity and is gradually shifting to Latin American oil from Venezuela, Colombia, Mexico and Brazil.

"Middle East crude slowly will get reduced in our basket. If they are not low API, if they are costlier, we will reduce. Ultimately, it's a question of optimising margins," Gupta said.

Essar is also reducing dependence on oil from Iran, its single largest supplier, in line with plans by other Indian refiners as international sanctions target the flow of Iran's exports.

The U.S. and its allies aim to reduce Iran's oil revenues to pressure Tehran not to build nuclear weapons.

Essar had renewed a contract with Iran in January for 100,000 bpd, Gupta said, the same volume as last year.

Iranian crude would account for around 25 per cent of Essar's supplies when the expansion was completed, down from around 40 per cent, he added.

Industry sources have told Reuters Essar plans to cut 15 per cent from its 100,0000 bpd contract, which runs from April 2012 for a year. Gupta declined to comment.

Earlier this month, data published by a leading industry consultant showed India has vaulted to the top of the list of Iran's oil customers, overtaking China, in a first-quarter buying surge ahead of tighter sanctions against Tehran this summer.

India's Iranian crude imports could fall around 25 per cent from April, when new annual contracts take effect.