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KRL Vs MRPL: Round-I - Views on News from Equitymaster
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KRL Vs MRPL: Round-I
Jun 15, 2006

In the previous article, we analysed the refineries established in southern India – advantages and growth prospects. In this write up, we analyse the comparative performance of Kochi refineries with that of its regional peer, MRPL. About Kochi refinery:
Kochi Refinery (KRL), a subsidiary of refining and marketing major, BPCL, is a standalone refinery operating in Kochi, Kerala, and has a 21% share of the installed refinery capacity in southern India. The company has an installed capacity of 7.5 million metric tonnes and crude for the refinery is arranged by BPCL, who also purchases a large part of its output. Some of the major outputs of KRL include LPG (liquefied petroleum gas), petrol, diesel, kerosene, naphtha, ATF and bitumen. KRL entered the petrochemicals sector in 1989, when the company’s production facilities with a design capacity of 87,200 tons per annum of benzene and 12,000 tons per annum of toluene were commissioned.

About MRPL:
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.

Capacity utilisation analysis:
KRL has registered capacity utilisation well above 90% over the last six years, which was not the case with MRPL and there are reasons for the same. MRPL’s utilisation has improved offlate (post the ONGC takeover from the Birla group). 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 performance:
Over the period under consideration, KRL registered a CAGR of 16% in net sales as against 54% of MRPL. The principal reason for this higher sales growth in the case of MRPL is increased capacity utilisation accompanied by capacity augmentation. As far as KRL is concerned, growth at the topline level was purely a function of a sharp rise in prices of petroleum products in the global markets. What is important to note is the fact that despite poor capacity utilisation, MRPL’s operating level performance has been robust, which is commendable.

Top to bottom comparison…
(YoY change) Net sales Operating profits Profit before tax
Kochi MRPL Kochi MRPL Kochi MRPL
FY02 -18.7% 85.9% 51.2% 118.4% 15.7% NA
FY03 59.1% 50.0% 182.4% 139.5% 487.4% NA
FY04 6.8% 41.3% 15.4% 207.8% 30.6% -12.0%
FY05 33.3% 62.5% 28.3% 162.1% 31.1% 154.3%
FY06 12.0% 34.9% -65.5% -42.4% -72.9% -57.4%
FY01-FY06 CAGR 15.6% 53.9% 16.9% 61.9% 25.8% NA

Kochi refinery has registered a CAGR of 26% in PBT (FY01-FY06) while it is not applicable for MRPL because it was a loss making company (largely on account of high interest costs). KRL growth is primarily due to increased GRM’s internationally and shifts of Indian refineries to import parity pricing in FY01. While the same stands for MRPL, debt restructuring and synergies post the ONGC’s acquisition have also played a vital role in the turnaround.

Key performance ratios…
(%) Operating margins Net profit margins
Years Kochi Refinery MRPL Kochi Refinery MRPL
FY01 2.9% 3.4% 1.3% -9.0%
FY02 5.3% 4.0% 1.2% -9.2%
FY03 9.5% 2.9% 4.9% -5.1%
FY04 10.2% 6.3% 5.6% 4.0%
FY05 9.8% 10.2% 6.4% 4.8%
FY06 3.0% 4.3% 1.4% 1.5%

Kochi refinery’s operating margins were 2.9% in FY01 (when refining margins were weaker in the global markets), which increased to 9.8% in FY05. However, due to discounts to oil marketing companies (BPCL and HPCL), there has been a drastic fall in operating margins to 3% in FY06. Operating margins for MRPL has also improved due to the turnaround in industry fortunes. Operating margins for MRPL in FY05 and FY06 are higher due increased thrust to export (currently 48% of the net sales), which invariably does not have issue in regard to discounts. Net margin for Kochi refineries is higher than that of MRPL, as company is using depreciated plant.

Conclusion: As the first in the series of articles, we have largely dwelled on the financial performance and not valuations. We will do a detailed valuation comparison and what investors should look for while investing in a standalone refinery in our next article.

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