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MRPL: A new chapter

Aug 2, 2004

Introduction to results
MRPL, ONGC's refining subsidiary, has announced its 1QFY05 results. While the topline growth stands at 93%, the company has posted a net profit of Rs 1,119 m as against a net loss of Rs 860 m in 1QFY04.

What is the company's business?
MRPL is a pure refining company with a rated capacity of 9.7 MMTPA (million tonnes per annum) and is now increasing capacity by 3 MMTPA in the next three years. This is a strategic move, as its parent ONGC now plans to enter into the retail marketing business along with MRPL, which itself has a license to set up nearly 500 retail outlets. The company's capacity utilization is likely to improve going forward as parent, ONGC ensures stable availability of crude from its fields. To put things in perspective, MRPL is the only refinery to receive the Sudanese crude from OVL, which would help improve yields.

(Rs m) 1QFY04 1QFY05 Change
Net Sales 22,163 42,832 93.3%
Other Income 36 161 350.0%
Expenditure 21,550 39,611 83.8%
Operating profit (EBDITA) 613 3,221 425.7%
Operating profit margin (%) 2.8% 7.5%  
Interest 1,049 670 -36.2%
Depreciation 940 942 0.2%
Profit before tax (1,340) 1,771  
Tax (480) 652  
Profit after tax/(Loss) (860) 1,119  
Net profit margin (%) -3.9% 2.6%  
No. of shares (m) 1,752.6 1,752.6  
Diluted earnings per share (Rs)*   2.6  
P/E Ratio (x)   18.8  
(* annualized)      

What has driven performance in 1QFY05?
Sales:  Topline growth of 93% is largely due to better capacity utilization and stable crude supply. It should be noted that upto FY04, oil marketing companies' (OMC) offtake from MRPL was a meager 6 MMTPA, while currently the offtake as per the agreement entered into by these companies is likely to be around 9 MMTPA. This is due to the fact that the OMCs would have to purchase products from PSU refineries on a priority basis, as per the government order. Better product prices at the refinery gate coupled with higher volumes have therefore, propelled such an improvement in the topline.

Expenditure Table

(%) of sales 1QFY04 1QFY05
Raw materials consumed 93.5% 87.7%
Staff cost 0.3% 0.2%
Other expenditure 3.5% 4.6%

Operating margins:  MRPL has been successful in controlling its expenditure with a 580 basis points improvement in its raw material purchases, which accounts for nearly 90% of sales. Stable supply of crude from ONGC and better mix has helped the company produce high value add products, which have trickled down into better realizations. As a result the operating margins have increased by 470 basis points YoY.

Net profit:  Better margins at the refinery gate coupled with a 350% rise in other income on account of write back of excess provisional taxes have resulted in a net profit of Rs 1.1 bn for the company. Further, the Debt Restructuring Package (DRP), as worked out by the FIs and ONGC has done wonders to MRPL. As a result, the company has successfully arrested its interest outgo by 36% during the 1QFY05. Chart 1

Over the last four quarters:  MRPL has witnessed a steady growth in its topline over the last four quarters since ONGC has taken over management control. However, operating margins have been volatile largely on account of raw material (read crude) prices.

What to expect?
MRPL is currently trading at Rs 48, implying a P/E multiple of 19x annualized 1QFY05 earnings. Although expensive in absolute numbers, given its past performance, MRPL is currently witnessing a turnaround in fortune since ONGC's takeover. Higher capacity utilization coupled with better management of resources and stable supply of quality crude from ONGC's fields has resulted in a refined performance. Going forward, the company is also venturing intro retail marketing of fuel and also expanding capacity by 3 MMTPA, which would be a strategic move as the company would turn out to be the retail face of ONGC's marketing plans. However, being a standalone refinery, currently, the company is vulnerable to high volatility in crude and international product prices. Refining margins may come under pressure in the medium-term.

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