MRPL: Up and running - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

MRPL: Up and running

May 8, 2006

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.

Palpable difference…
Particulars FY01 FY02 FY03 FY04 FY05 FY06
Capacity 3.0 9.0 9.7 9.7 9.7 9.7
Capacity utilisation 71.0% 59.2% 75.0% 104.0% 122.0% 125.0%

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…
Particulars FY01 FY02 FY03 FY04 FY05
Net sales 28,836 53,539 80,588 113,906 185,083
% change 85.7% 50.5% 41.3% 62.5%
PBDIT 1,445 2,878 4,026 13,572 20,992
% change 99.2% 39.9% 237.1% 54.7%
PBT (2,668) (7,789) (6,528) 5,745 14,609
PAT (1,851) (4,925) (4,118) 4,594 8,798
EPS -2.3 -6.2 -5.2 2.6 5.0

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.

Equitymaster requests your view! Post a comment on "MRPL: Up and running". Click here!


More Views on News

MRPL 2020-21 Annual Report Analysis (Annual Result Update)

Oct 20, 2021 | Updated on Oct 20, 2021

Here's an analysis of the annual report of MRPL for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of MRPL. Also includes updates on the valuation of MRPL.

5 Green Energy Stocks to Watch as India Readies for a Revolution (Views On News)

Oct 13, 2021

The excitement around green energy stocks has opened up a huge contrarian opportunity in the traditional energy space.

Top Performing PSU Stocks over the Past One Year (Views On News)

Oct 1, 2021

After a decade of underperformance, PSU stocks have woken up. Here are the best performing PSUs of past twelve months.

Linde India Shares Hits New High. Up 230%+ in One Year (Views On News)

Aug 26, 2021

Linde India shares have surged sharply in the past few trading sessions. What's causing the rally?

ONGC Logs Massive Jump in Net Profit as Crude Oil Prices Double (Views On News)

Aug 16, 2021

Rising crude oil prices compensate ONGC's fall in production.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.

7 Stocks that Mutual Funds Can't get Enough of (Views On News)

Dec 1, 2021

Come hell or high water, these are the top Indian stocks which mutual funds never leave.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 7, 2021 (Close)