The share price of Mangalore Refinery & Petrochemicals Ltd. (MRPL), the first joint sector refinery in the country, had been on a decline for two years ending Nov '01. During this period, the scrip fell from Rs 21 to Rs 5 levels. Recently, the company was in focus as Oil & Natural Gas Corporation (ONGC) acquired co-promoter stake from the A.V. Birla group.
Valuations: ONGC to the rescue
Mkt cap / sales
EV / EBITDA
Book value/ share
Mkt Cap/ tonne
EV / tonne
NAV / share*
*@ Rs 6,000 / MT ** Current market price *** Post financial restructuring
Despite the East Asian crisis over FY98, which led to a sudden dip in commodity prices, the company reported healthy operating performance. Financials were not impacted, as the refining sector was under Government regulation with refiners' guaranteed a return on investment of 15%. Deregulation of the industry -- FY99 -- coincided with firming oil markets, as the Organisation of Petroleum Exporting Countries (OPEC) initiated production cuts to revive sagging oil prices. Sharply rising feedstock prices eroded operating margins/profits. Further, high (fixed) interest cost put pressure on cash flows and wiped out post-tax profits. Starting FY99, the company also initiated work on expanding refining capacity from 3 m metric tonnes per annum (MMTPA) to 9 MMTPA. The unfortunate turn in industry environment -- squeezing internal accruals -- delayed completion of project expansion, which is likely to have come onstream in FY02. The same is reflected in the dramatic rise in interest and depreciation costs for FY02.
Considering large build up of losses, continuing weakness in refining margins and requirement of fresh capital, MRPL co-promoter A.V. Birla group expressed desire to exit the venture last year. Consequently, the stock price reacted upwards, as markets expected foreign majors to view the development favourably for establishing a foothold in the soon to be deregulated domestic petroleum sector. HPCL, having first right of refusal, was offered the stake at Rs 14 - Rs 16/ share. We hinted in our earlier report (Read More) of doubts about the deal consummating at the offer price. In August '02, A.V. Birla group sold their stake to oil exploration & production (E&P) major, ONGC for Rs 2/ share. Considering opportunites arising in leadership businesses, A.V. Birla group has been more compromising, expediting the deal. At time of acquisition, MRPL book value was Rs 4.3/ share and the acquisition price is in line with industry price/book value metric of 0.4x.
ONGC acquistion - Pocket change
No. of shares
Promoter stake aquired
ONGC acquired 37.4% stake in MRPL for a consideration of Rs 594.3 m. As per reports, under the scheme of financial restructuring, ONGC will infuse further a sum of Rs 10 bn with lenders converting an estimated Rs 7.5 bn of debt into equity. The restructuring will result in ONGC acquiring ownership control of 51% stake. The latest ONGC annual report states that the company has acquired 51% shareholding in MRPL. The table exhibits the salutary effect on capital structure.
Pre-acquistion capital structure
A.V. Birla group
Debt / Equity (x)
Interest cover (x)
Post-acquisition capital structure*
Debt / Equity (x)
* All nos are estimates ** All nos in Rs m
The acquisition made ONGC the first integrated oil & gas company in the country -- Reliance merger came into effect later -- with E&P and refining assets. The global industry model is to be present along the entire petroleum value chain from E&P, refining, petroleum marketing and petrochemicals. ONGC has received license from the Government to enter the lucrative petroleum marketing business. As per reports, the company has a license to set up 600 retail outlets. The acquisition -- satisfying market entry conditions -- ensures access to supply of products. E&P, by nature is a cash rich business. We estimate, ONGC to have free cash flows in FY03 of Rs 8 bn. We do not expect the deal to put pressure on the company.
Assuming ONGC has infused Rs 10 bn and lenders have converted debt of Rs 7.5 bn, the leverage ratio of MRPL has come to more manageable levels of 2.4x from 16.7x earlier. The scrip, however, based on most valuation metrics is at a premium to industry peers -- stand-alone refineries. However, with company making losses, stocks tend to trade within range of book value. We reckon, with access to cheaper crude oil from ONGC, refining margins are likely to improve. Also, foray into petroleum marketing expected over the next two years could lead to higher operating margins.
Having said that, oil prices continues to rule firm and refining margins are likely to remain under pressure in FY03. Also, the product slate of MRPL, based on blended realisations, seems to be skewed towards heavy distillates, which are low value with higher volatility. To revive fortunes, besides decline in oil prices, MRPL may need to further reduce interest burden, alter production basket and roll out petroleum marketing business. Therefore, respite could only be in the medium term.
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