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MRPL: On the right track - Views on News from Equitymaster
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MRPL: On the right track
Feb 8, 2005

Performance Summary
MRPL, the refining subsidiary of the country's largest exploration and production company ONGC, announced its 3QFY05 results last month. For 3QFY05, the topline witnessed an impressive growth of nearly 59% YoY while the bottomline has grown manifold by over 627% YoY on the back of stable crude supply and high product prices coupled with better capacity utilization.

What is the company's business?
MRPL, a standalone refinery with rated capacity of 9.7 MMTPA (million metric tonnes per annum), is a subsidiary of ONGC, which holds over 71% shares in the company. MRPL has witnessed a major turnaround in its fortunes post the takeover by ONGC. The refinery is one of the most advanced in the country and is probably the only PSU refinery to meet the Euro III norms. It is also planning to venture into downstream fuel marketing segment as the government has granted permission to set up 1,600 retail outlets along with its parent. MRPL is the only refinery in the country to receive crude oil from OVL, ONGC's overseas subsidiary, through its Sudan blocks.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 30,849 49,030 58.9% 78,102 133,717 71.2%
Expenditure 29,639 44,081 48.7% 75,269 120,291 59.8%
Operating profit (EBDITA) 1,210 4,949 309.1% 2,833 13,426 373.9%
EBDITA margin (%) 3.9% 10.1%   3.6% 10.0%  
Other income 1,366 1,299 -4.9% 1,693 422 -75.1%
Interest 1,007 557 -44.8% 3,117 1,813 -41.8%
Depreciation 950 954 0.4% 2,839 2,848 0.3%
Profit before tax 618 4,738 666.1% (1,429) 9,189  
Tax 222 1,854 735.4% (512) 3,500 -783.3%
Profit after tax/(loss) 396 2,884 627.4% (917) 5,689  
Net profit margin (%) 1.3% 5.9%   -1.2% 4.3%  
No. of shares (m) 1,752.6 1,752.6   1,752.6 1,752.6  
Diluted earnings per share (Rs)* 0.9 6.6   (0.7) 4.3  
Price to earnings ratio (x)         12.0  
(* annualised)            

What has driven performance in 3mFY05?
Import parity doing wonders: During 3QFY05, MRPL has witnessed an impressive growth of nearly 59% in the topline on the back of strong realizations aided by the firm international product prices. Post APM dismantling, refineries are compensated at the international prices and MRPL, with its high value add, high yield products has been able to improve realizations. Having said that, the company witnessed a jump of 13% in export revenues. Given the backdrop of better realizations, the PSU refineries operated at higher than rated capacity, we therefore believe that MRPL has benefited from higher volumes too.

(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 93.3% 86.0% 93.0% 87.2%
Staff cost 0.2% 0.2% 0.3% 0.2%
Other expenditure 2.5% 3.7% 3.1% 2.5%

Benefits from economies of scale: During the quarter, MRPL has been successful in improving its operating margins by 620 basis points on the back of a faster growth in realizations and economies of scale. To put things in perspective, the refinery achieved a capacity utilization of 125% during 3QFY05 as compared to 110% during the corresponding period last fiscal, with crude throughput higher by over 13% YoY. Stable crude oil supplies coupled with higher refinery gate prices helped the company improve operations.

Reflecting in the bottomline: MRPL has witnessed a jump of over 627% YoY in the bottomline during the quarter. However, this comes on the back of a lower base. The Debt Restructuring Package (DRP) introduced by the financial institutions and the parent company has helped MRPL swap a part of debt into equity through convertible bonds, while a part has been swapped against low cost debt, thereby retiring higher interest obligations.

What to expect?
At Rs 52, the stock is trading at a price to earnings multiple of 12 times its annualized 9mFY05 earnings (price to cash flow multiple of 10.7 times). MRPL is the only refinery in the country to produce Euro III compliant diesel while other refineries are struggling to meet the targets. Although the stock is expensive at current valuations as compared to its peers, ONGC's presence and the downstream expansion would help the company grow further going forward.

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