Mangalore Refinery & Petrochemicals Ltd. (MRPL), the joint venture between Hindustan Petroleum Corp. Ltd. (HPCL) and A.V.Birla group, has probably tried to slip by the wayside without being noticed. With financials written in bold red the management seems to be ducking for cover. Indian Rayon & Industries represents the A.V.Birla stake in the company.
Operating Profit (EBDIT)
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Taking a step back, looking at the performance, the company reported a 20% growth in topline while bottomline slid by 21% in the first nine months of the previous fiscal. From these levels, MRPL has posted a 10% drop in topline while is has managed to cutback on the losses for the full year ended March '01. This stark performance is largely due to 4QFY01 operations. The sales numbers clearly point out a slowdown or stoppage in operations in the quarter. As per the company, the hike in crude oil prices, non-commensurate increase in final product prices and inadequate net tariff protection has driven the company to take such steps.
Over the past two years the company has faced severe operational difficulty primarily due to the surge in crude oil prices from $15/ barrel in FY99 to $30 / barrel in FY01. The debt burden increased significantly in FY00, as inadequate operating profits and high interest costs led to a cash crunch in the company. Operating profits as yet do not cover interest expense. This puts the company at the risk of a debt trap, which we had pointed out in our earlier report. To clean up the financial mess, MRPL has undertaken a capital restructuring programme and has appointed an investment banker to advice the company on financial restructuring. The desire to rope in an additional equity partner seems to be driven by the above objective. Proceeds from sale of stake will be used to payoff debt and reduce the financial leverage (debt/equity).
Additional debt may also have been raised to augment refinery capacity from 3 m metric tonnes per annum (MMTPA) to 9 MMTPA. The project was completed during FY01 and commercial production commenced in the current fiscal (April '01). There seems to have been a misjudgment in timing of the expansion. The investment, although phased, yielded no return during the construction phase and was undertaken when oil prices were ruling low. The rise in oil prices cut back on internal accruals, which seems to have derailed financial planning of the project.
The company, in the past, has been in talks with several international oil majors to participate in the equity as strategic investors. The list includes Kuwait Petroleum, TotalFinaElf and AbuDhabi National Oil Company (Adnoc). However, not much seems to have materialised from the discussions. The strategic sale will raise funds, which could be deployed to enter marketing of transportation fuels, as the sector is to be deregulated by April '02. Also, an international partner will help provide strategic insights on the new domain.
MRPL meets the Government investment criteria for entering the fuel marketing business and is awaiting the grant of marketing rights. Currently, the company does not earn any marketing margins, which has contributed to the financial distress. Post deregulation marketing margins are expected to increase and smoothen the volatility seen in the refining margins. MRPL had roped in Andersen Consulting, now Accenture, to chalk out a marketing plan for the post deregulation era and has been advised to set up an independent retail network.
In latest developments, the A.V.Birla group has expressed interest in exiting from the project. As part of the shareholder agreement, HPCL has the first right to refusal and is currently evaluating the proposal. Reportedly, Indian Oil Corp. (IOC) has also evinced interest in acquiring the stake on the condition of enjoying management control. Both HPCL and Indian Rayon & Industries hold 37% stake in MRPL. The company definitely needs an infusion of cash to fix its capital structure and fund future expansion plans. Currently, MRPL is trading at Rs 6.
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