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KRL Vs MRPL: Round- II - Views on News from Equitymaster

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KRL Vs MRPL: Round- II

Jun 22, 2006

In the previous article we evaluated the financial performance of KRL and MRPL over the recent past. Taking our analysis to the second stage, we will now analyse the key financial ratios for KRL and MRPL along with their historical valuations.

Financial analysis….
For the period under consideration (FY01 to FY05), sales per share for KRL increased at a CAGR of 16% as compared to 31% in the case of MRPL. The higher growth for MRPL is due to lower base effect and under utilisation of refining capacity upto FY03 (as explained in the previous article). The cash flow per share has registered a CAGR of 48% for KRL, which can be attribuated to surge in volumes along with strong GRMs internationally. MRPL has turned around from the negative cash flow per share in FY03 to Rs 7.2 per share in FY05 on the back of restructuring and improved business prospects. KRL has had lower financial leverage as compared to MRPL as its D/E ratio has been much lower than that of MRPL. Turnover ratios were historically better in the case of KRL, but of late MRPL has managed to catch up with it on this front, thus reflecting better utilisation of fixed assets, inventory and improved working capital management.

Key financial ratios
Years FY01 FY02 FY03 FY04 FY05
Particulars Kochi MRPL Kochi MRPL Kochi MRPL Kochi MRPL Kochi MRPL
Sales per share 517.6 36.7 411.1 67.2 648.6 46 708.2 66.1 953.2 106.7
Cash flows per share 14.2 -1.2 14 -1.6 42.1 -0.2 47.5 4.8 67.9 7.2
D/E ratio 0.5 6 0.5 8.6 1.2 7.4 0.2 4.1 0.1 2.3
Current ratio 1.2 0.76 2.2 0.79 2.1 1.02 2 0.83 2.6 0.8
FixedAssets turnover ratio 4.1 0.63 3.3 0.81 4.9 1.3 5.2 1.9 6.6 3.1
Inventory turnover ratio 10.9 4.3 11.1 7 14.6 9.4 13.7 11.5 13.7 13.4
Debtors turnover ratio 92.5 22.5 26.1 18.5 16 22.6 13.8 22.1 16 23.4
Interest coverage ratio 2 -0.12 2 -0.2 8 -0.15 22 2.54 35 7.36
Return on asset(%) 1.8 -3.8 2.9 -6.9 12.3 -6.1 14.2 6.3 17.1 10.8

Analyzing the performance of the companies based on the Du Pont model, it becomes clear that the net profit margins are higher and stable for KRL with an average net profit margin of 3.9% as against negative 2.9% in the case of MRPL. On the asset utilisation front, KRL out scores MRPL as its average asset utilisation ratio is 2.1 times as compared to 1.1 times that of MRPL. On the funding aspect, MRPL has a higher financial leverage indicated by the higher average total assets/equity of 9 times as compared to 2.8 times that of KRL. Return on equity (ROE) improvement for MRPL has been commendable over the last two years, the reason being higher financial leverage propelling the good operating performance.

Du Pont Analysis
Particulars Net Profit/ Sales Sales/ Total Assets Total Assets/ Equity ROE
Company Kochi MRPL Kochi MRPL Kochi MRPL Kochi MRPL
FY01 1.5% -9.0% 1.35 0.4 3.87 9.1 8.0% -33.4%
FY02 1.2% -9.2% 1.88 0.7 2.72 17.5 6.0% -105.6%
FY03 4.9% -5.1% 2.25 1.0 2.86 8.2 31.7% -40.7%
FY04 5.6% 4.0% 2.26 1.3 2.41 6.0 30.7% 31.2%
FY05 6.4% 4.8% 2.66 2.0 1.93 4.2 32.9% 40.8%

Although the historical figures are skewed towards KRL, with ONGC acquiring stake in MRPL in FY03, the benefits of the same started accruing to the latter since FY04. However, here it needs to be pointed out that going forward, with the change in the business dynamics of both the players, the two will be in a position to compete effectively against each other.

Valuations over the years…
MRPL has commanded better valuation multiples in the past as compared to that of KRL. MRPL has historically traded at an average P/BV multiple of 3.54 as against 0.91 that of Kochi refineries from FY01 to FY05. Similarly, the average P/E multiple of MRPL (5.9 times) is on the higher side compared to that of Kochi (5.1 times). In spite of better operational and financial performance over the years, KRL still traded at a discount to MRPL. The key reason for this being the future prospects of MRPL once it is able to offload its debt and command a lower price to book value (P/BV). Higher valuation is also explained from the fact that turnaround companies usually trade at higher valuation owing to low base effect and future growth potential.

Historic trends…
Particulars P/BV P/E ratio
Company Kochi MRPL Kochi MRPL
FY01 0.4 0.8 4.8 N.A
FY02 0.6 1.6 9.6 N.A
FY03 1.1 5.2 3.5 N.A
FY04 1.4 6.0 4.7 19.4
FY05 1.0 4.1 3.1 10.1
Current 0.7 2.6 8.8 17.5

What to expect?
Currently, KRL is trading at a P/BV of 0.7 times as compared to that of 2.6 times for MRPL. On the P/E ratio front, KRL is trading at 8.8 times FY06 earnings as compared to 17.5 times of MRPL. Going forward, the issue of discount to OMC’s, lower profitability due to reduction in custom duty and shift towards trade parity pricing will have a negative effect on standalone refineries like KRL and MRPL. The proposed merger of KRL with its parent company, BPCL, will benefit BPCL more than KRL in the long-term (as BPCL will be less dependent on outside refineries for sourcing petroleum products). As far as MRPL is concerned, it is insulated from the policy changes in the domestic markets, as it exported roughly 49% of its output in FY06, albeit to an extent. But with the company setting up 1,000 marketing network over the next three years (on behalf of ONGC), given the current pricing policy, we expect it to have a negative impact on the overall profitability. In all, we have a very cautious view on standalone refineries and marketing companies given the fluid policy situation. The risk-return trade off is not in favour of the investor at the current juncture.

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