The Essar Oil stock hit the upper circuit (up 5 per cent) today on news that the company’s board has approved the delisting proposal mooted by promoter Essar Energy Holdings. Approval of the public shareholders will now be sought through postal ballot to pass a special resolution to go ahead with the delisting proposal.

The proposal to delist Essar Oil from the BSE and the NSE follows close on the heels of Essar Energy Plc being delisted from the London Stock Exchange earlier this month. This is in line with the group’s strategy of taking its entire hydrocarbon and energy business private to lend more operational and financial flexibility to the business.

The Essar Oil stock had already doubled since March end. This is, in large part, due to the company’s operational performance improving significantly in 2013-2014 - thanks to its upgraded and improved refinery.

That said, the delisting rumours floating around for some time also seem to have helped. The latest development is likely to add to the stock's momentum. This is because the eventual delisting price will be determined by the public shareholders through the reverse book-building process, in which they quote the price at which they are willing to tender their shares. This ‘discovered’ price is inevitably higher than the floor price (minimum price) fixed by the company for the delisting.

A risky bet

But betting on the stock in the hope on its eventual delisting can be risky for investors. There can be many a slip between the cup and the lip. First, in the postal ballot, the number of public shareholder votes in favour of the delisting proposal must be at least twice the number of votes against it. Next, the promoter group may not accept the ‘discovered price’ (if it perceives it to be too high); in such a scenario, the delisting proposal fails. Delisting will also not happen if the minimum tender condition is not met. So, unless Essar Oil’s promoter group is able to increase its stake in the company from 72.47 per cent currently to 90 per cent, the delisting offer will fall through.

While Essar Oil’s operational performance should continue to remain healthy in the coming quarters, its high debt levels which are dragging down the performance at the net level remains a concern. The company’s total debt is in excess of Rs 21,000 crore and its debt-to-equity ratio is very high at 8.5 times. At Rs 114 currently, the Essar Oil stock trades at a steep 125 times its trailing consolidated earnings.

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