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MRPL: Ball in HP's court - Views on News from Equitymaster
 
 
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  • Sep 27, 2001

    MRPL: Ball in HP's court

    The first private sector refinery in the country, Mangalore Refinery and Petrochemicals Ltd. (MRPL), has taken it on the chin, especially over the past two years with oil markets striking a stiff upper cut. Oil prices have held firm in 1QFY02, not easing the pressure on margins. During this period, YoY losses of the company increased largely due to a sharp jump in interest expense.

    Besides the difficult operating environment including higher feedstock prices, low net tariff protection and reduced petroleum demand the company has an imbalanced capital structure, which has added to its woes. At the end of FY01, the financial leverage stood at 7.9x and interest coverage ratio at 0.4x. This could result in the company getting entangled in a debt trap. The deteriorating financial performance over the past five years seems to be the overriding reason for the A.V.Birla group wanting out. The group though has stated incompatibility with its JV partner in running the operations.

                   What do the numbers say
        KRL CPCL MRPL
    No. of shares m 137.8 147.2 794.7
    Sale of holding   55.0% 52.5% 37.0%
    Shares acquired m 75.8 77.3 294.0
    Purchase price Rs 86.0 65.9 14.0
    Acquisition cost Rs m 6,522.7 5,095.3 4,116.6
    MP* Rs 56.6 36.1 5.2
    Book Value Rs 95.8 78.3 8.1
    Sales Rs m 71,366.0 71,326.2 67,193.2
    Capacity MMTPA** 7.5 7.0 9.0
    * At time of announcement ** m metric tonnes per annum
    Premium to MP   51.9% 82.6% 171.8%
    EV* Rs m 16,157.8 19,416.7 61,480.2
    EV / tonne Rs 2,154.4 2,773.8 6,831.1
    Acquisition price / BV x 0.9 0.8 1.7
    Market cap Rs m 11,850.8 9,705.4 11,125.8
    Market cap/sales x 0.2 0.1 0.2
    Valuations based on acquisition price *Enterprise value

    Both promoters, the A.V.Birla group and Hindustan Petroleum Corp. (HPCL), hold 37% stake in the company. As part of the shareholder agreement, HPCL has the first right to refusal and is currently evaluating the proposal of purchasing the A.V.Birla group stake. Reportedly, Indian Oil Corp. (IOC) has also evinced interest in acquiring the stake on the condition of acquiring management control.

    There has been sizeable restructuring in the industry with stand alone-public sector (PSU) refineries being acquired by refining & marketing (R&M) companies at the end of FY01. Post FY02, the petroleum sector is expected to be completely deregulated, which could lead to more structural changes. Kochi Refineries Ltd. (KRL) and Chennai Petrochemical Corp. (CPCL) were acquired by Bharat Petroleum (BPCL) and Indian Oil Corp. (IOC).

    MRPL, similar to KRL and CPCL, falls under the stand-alone refineries vertical. In a comparative valuation exercise, MRPL seems to have been valued higher based on acquisition price, compared to the other two refining companies. However, this could be more of an undervaluation case for the PSU refineries. Earnings multiple (P/E) is not a very helpful metric, as MRPL is a loss making company. Consequently, market cap/sales could be used as a replacement. This seems to be one of the metric used by the valuators, as valuations are on an even keel between companies. The enterprise value (EV) also look reasonable with industry averages near Rs 6,000/tonne. But one has to keep in mind the product slate of the company.

         Value lies in the eyes of the beholder
    Replacement cost Rs m 54,000
    Net Debt Rs m 50,390
    NAV** Rs m 3,610
    NAV/share Rs m 4.5
    * All numbers are estimates **Net asset value    

    On an estimated replacement cost basis the value of an equity share of MRPL is Rs 4.5. On day of announcement of the valuation report the scrip was trading at Rs 5.1. Also, the company has a negative net working capital. Adjusting for the same, the NAV per share drops to Rs 2.6. It will be interesting to see at what price HPCL acquires the A.V.Birla stake.

     

     

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