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MRPL: The ordeal continues...

Jun 5, 2006

Introduction to results
MRPL, the refining subsidiary of country's largest exploration and production giant ONGC, announced its 4QFY06 and FY06 results. For FY06, despite a 35% growth in the topline, operating profits fell by 42% YoY. Subsidy sharing with OMC's, increase in crude oil prices, lower other income and reduced offtake of products by OMC's (having high margins) led to a contraction in net margins by 330 basis points to 1.5% (4.8% in FY05). Performance for 4QFY06 was even worse, as bulk of the subsidies was provided to OMC's during this quarter.

What is company's business?
MRPL, an ONGC subsidiary, is a refinery with an 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.

Financial snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 51,366 63,920 24.4% 185,083 249,675 34.9%
Expenditure 45,971 63,269 37.6% 166,261 238,840 43.7%
Operating profit (EBDITA) 5,396 651 -87.9% 18,822 10,836 -42.4%
EBDITA margin (%) 10.5% 1.0%   10.2% 4.3%  
Other income 1,442 234 -83.8% 1,864 768 -58.8%
Interest 484 444 -52.5% 2,296 1,878 -18.2%
Depreciation 934 844 -9.6% 3,781 3,500 -7.4%
Profit before tax 5,420 (403) -107.4% 14,609 6,226 -57.4%
Tax 2,311 (108) -104.7% 5,811 2,510 -56.8%
Profit after tax/(loss) 3,109 (295) -109.5% 8,798 3,716 -57.8%
Net profit margin (%) 6.1% -0.5%   4.8% 1.5%  
No. of shares (m) 1,752.6 1,752.6   1,752.6 1,752.6  
Diluted earnings per share (Rs) 1.77 (0.17)   5.0 2.12  
Price to earnings ratio (x)         19.34  

What has driven the performance?
Realisations drives growth: MRPL registered a growth of 35% YoY in topline for the fiscal. Since the results did not disclose the sales volumes, realisations could not be determined. Our understanding is that the growth in topline for MRPL was primarily due to better realisation over the previous fiscal (as was the case with other players). The same is also substantiated from the fact that MRPL operated at a capacity utilisation of 125%, a nominal increase from 122% in FY05. Taking all these things into perspective, the realisation for this fiscal must have improved by 27% to 30%. Export, which formed 48% of the net sales in FY06 (up 94% YoY), was the key reason behind the improvement in realisation, as prices for exported products are based on the international prices (and hence no under recoveries).

Subsidies hurt margins: Spiraling crude prices, coupled with OMCs deviating from refining rates (thereby forcing discounts on invoice prices of subsidized products) continued to eat up into company's operating margins. Discounts offered to OMC's during the fiscal were Rs 3,986 m (1.6% of sales). Excluding the impact of discounts, operating margins actually work out to 5.8%( reduction of 4.4% YoY). Margins were also under pressure owing to lower offtake of high margins products by the OMC's (oil marketing companies). Decrease in refining margins internationally also lead to reduction in the margins for MRPL. For the quarter ended March 2006, margins fell by 9.5% to 1%. Excluding discounts, operating margins of MRPL stands at 3.4% in the quarter ended March 2006.

Cost breakup
(%) of sales 4QFY05 4QFY06 FY05 FY06
Consumption of raw materials 85.7% 97.1% 86.8% 92.6%
Staff cost 0.3% 0.2% 0.3% 0.2%
Other expenditure 3.5% 1.7% 2.8% 2.8%
Total expenditure as % of sales 89.5% 99.0% 89.8% 95.7%

Other income spoils the play: For FY05, the other income included receipts from ‘Target Plus' export benefit scheme to the tune of Rs 1,367 m. The government withdrew the scheme during the fiscal, resulting in a fall in other income by 59%. Excluding the effect of ‘Target Plus' scheme, the other income grew by 160% YoY. However, the decrease in interest expenditure provided some support to the bottomline. For 4QFY06, the discounts to OMC's was the primarily reason for MRPL to post loss on the bottomline front.

Performance over the recent past…
Particulars 4QFY06 3QFY06 2QFY06 1QFY06
Net Sales growth (%,YoY) 24.4% 38.7% 46.5% 31.5%
Operating profits growth (%,YoY) -87.9% -67.8% -4.7% 40.9%
Net profits growth (%,YoY) -109.5% -93.3% -1.5% 92.8%
Operating profit margins 1.0% 2.3% 6.4% 8.1%
Net profit margins -0.46% 0.28% 2.68% 3.87%

What to expect?
At the current market price of Rs 41, the stock is trading at a price to earnings multiple of 19.4 times FY06 earnings. The board recommended a dividend of Rs. 0.70 per share (dividend yield of 1.7%). It has also approved the refinery upgradation project, which will increase the refining capacity to 15 MMTPA from current level of 9.7 MMTPA. The project also involves improvement of distillate yield along with introducing new value-added products, which will increase margins. Direct marketing efforts of the company has also began to show positive results, as the direct sales as a percentage of net sales have increased from 2.1% in FY05 to 5.7% in FY06. However, in spite of all these positives, the macro environment for downstream energy players continues to remain unfavourable. To that extent, we maintain our cautious stand.

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