With the integrated refinery i.e. presence in refining and marketing of petroleum products still bleeding in light of the current pricing policy of the government, standalone refineries have managed to stay afloat. This was on the back of higher refining margins. But even here, forced discounts are an issue. In this background, we take a look at MRPL, the past performance and the future growth prospects.
What is the company's business?
MRPL, an ONGC subsidiary, is a refinery with installed capacity of 9.69 million metric tonnes per annum (MMTPA). It accounts for 28% of the refining capacity in southern India (7.6% of India's refining capacity). MRPL's refinery was the first in India to produce Euro-III complaint diesel and Euro-II complaint petrol. MRPL is an excellent turnaround story. In FY03, it was a sick company. Post the ONGC acquisition, fortunes have turned around and it is now a profit-making entity. The reasons attributable for the same are crude sourcing through ONGC, higher capacity utilization, financial restructuring, lower fuel losses and healthy refining margins in international markets.
What the numbers say?
Capacity utilization analysis:
The refinery initially had a refining capacity of 3 MMTPA, which was hiked to 9 MMTPA in FY01, and commercial production of the same started during FY02. The capacity utilisation was abysmal in FY01 in FY02 on account of factors like lack of scale in operation, uncompetitive cost structure and poor fiscal state of the company. HPCL, by virtue of its stake in the company, was one of the major buyers of products from the MRPL refinery. Post the ONGC acquisition, given the benefits with respect to crude purchases and financial re-engineering, MRPL was able to increase capacity utilisation well above industry standards.
Financial analysis:Sales have grown at a CAGR of 59.2% (FY01 to FY05), which is partly due to the capacity expansion and partly due to higher capacity utilization. The fact that the gross refining margins are significantly higher in FY05 than in FY01 is another key driver PBDIT has risen at a much faster rate of 95.2%, which is again driven by the factors mentioned earlier. At the net profit level, the turnaround was primarily led by financial restructuring.
The turnaround in short…
In FY06, the topline registered a growth of more than 36% YoY. However, MRPL posted more than 50% decline in net profit during the year. With IOC, HPCL and BPCL deviating from the agreed refinery gate price formula (in light of the lack of price revision by the government on the retail side), MRPL was forced to offer discounts (like every other refinery in the country).
Where to from here?
Crude procurement policy: Prior to the ONGC acquisition, the company imported significant portion of its crude requirements directly with assistance of Chevron's global trading and relied wholly on imported oil. This has changed significantly in the last three years. In FY05, the company processed roughly 35% of crude procured through indigenous source (ONGC), which has resulted in savings (transaction cost, transportation cost and crude price). The company purchases Mumbai-high crude, based on a pricing formula, which is advantages as compared to the landed cost of imported crude of equivalent quality. The association with ONGC will continue to bring benefits to the company in the long run.
Revenue Source: Even though India is surplus in refining capacities, newer capacities are cropping up. With demand for petroleum products not matching supply, export is the viable alternative. The contribution from exports to sales for MRPL has risen over the years (10% in FY02 to 42% in FY06). Though exports are a lower margin proposition, domestic majors are benefiting from the capacity crunch in the global markets and changing environmental regulations (demand for Euro-III fuel is expected to grow faster). While this is a positive in the medium-term, given the large-scale capacity expansion plans, we remain cautious with respect to export margins.
Marketing arrangement: Starting FY05, ONGC has identified MRPL as a channel for its expansion on the retail front (petrol pumps). Besides its own outlets, in FY04, the company has signed MOU (memorandum of understanding) with Shell and Essar Oil for sale of few petroleum products. MOU's are also in place with IOC, BPCL, and HPCL for products offtake for 3-years starting April 2006. These arrangements will increase domestic sales of products. Given the fact that ONGC intends to expand retail outlets to over 1,000, we believe that MRPL will be a key sourcing base for its southern outlets. Given this background, we believe that the company will be able to maintain capacity utilisation at a healthy rate, which is very important to benefit from economies of scale.
What to expect?
The stock is currently trading at Rs 52 at a price to earnings multiple of 23.6 times provisional FY06 earnings. Though valuations of the stock is on the higher side as compared to other standalone refineries like Kochi refinery (7 times earnings) and Chennai Petro. MRPL is planning to hike its refining capacity from 9.7 MMTPA to 15 MMTPA, which will propel the topline growth. However, we are apprehensive with respect to the company's retail plans, given the current pricing policy. Besides discounts on products at the refinery gate level, subsidy on the retail front will negatively impact the financial performance. To that extent, the risk profile of the stock is on the higher side.
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