Refinery stocks have had a dream run on the bourses in FY04 with Kochi Refineries, Chennai Petroleum and MRPL, all witnessing substantial increase in their share prices. This compelled us to look into one of these refineries, which witnessed a miraculous change in fortunes within a year of its referral to BIFR for industrial sickness to posting a net profit after takeover by ONGC.
MRPL, after the Debt Restructuring Package (DRP) agreed upon by the financial institutions, has witnessed a major correction in its Debt/Equity ratio from a one time high of 15:1 to nearly 3:1. As per the package, MRPL underwent Rs 5.3 bn restructuring whereby debt was converted into equity, preference shares and zero-coupon bonds.
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The company has been able to reduce its net losses consistently over the past few years and is likely to post a net profit in FY04. This has not come as a surprise after being taken over by ONGC. The takeover has resulted in optimum utilization of capacity (104% of the rated capacity of 9.7 m tonnes in FY04). This can be attributed to the fact that MRPL has been assured steady supply of crude at competitive prices from ONGC, which has enabled the refinery to maintain higher gross refinery margins (GRMs). Higher than expected GRMs in FY04 is one of the major reasons for the turnaround.
With the retail sector now open, MRPL is all set to enter into the lucrative business of marketing fuel in the country armed with its license to set up 500 retail outlets. It has entered into a memorandum of understanding with Shell India to supply products to the latter. Further, with ONGC having a license to set up 1,100 retail outlets and MRPL being the only refinery in the ONGC stable, current capacity utilization is likely to continue over a period of time and growing demand for petroleum products shall ensure competitive GRMs. As a matter of fact, ONGC plans to invest Rs 20 bn to increase MRPLís capacity by 3 m tonnes over the next couple of years.
Currently at Rs 59, the valuation parameters like P/E and P/CF would not make much sense as 9mFY04 results clocked a negative bottomline, while MRPL is likely to end FY04 in a positive territory. MRPLís retail venture, capacity expansion plans and also optimum capacity utilization given a stable supplier in the form of ONGC are likely to pan out into a better operating environment for the refinery in the medium to long term. However, the company is likely to face stiff competition from the other major oil marketing companies in the fray such as IOC, HPCL and BPCL, which have an established brand equity and retail network. Quite a bit of the potential positives is already in the stock price.
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