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HPCL: MRPL leech

Oct 12, 2001

Few refinery stocks have made an impressive comeback after the September 11 incidents. Exactly a month later, Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) have not only recouped their losses but are trading higher by 7.6% and 6.1% respectively over this period. On the other hand, Indian Oil (IOC) and Reliance Petroleum (RPL) are down 1.8% and 11.2% respectively.The rise in these stocks could be due to the strong value they offer. At their lows, BPCL and HPCL were trading at 4.2x and 3.9x 1QFY02 annualised earnings. But then again, for the last 18 months, they have always traded in that range. Any rise seems to be driven as visibility on dismantling of APM and disinvestment improves.

The HPCL scrip, however, has some new concerns. Mangalore Refinery & Petrochemicals Ltd. (MRPL), jointly promoted by the A.V. Birla group and HPCL, has amassed losses of Rs 5.9 bn over the last two years and is expected to report a loss of 2.3 bn for the current fiscal. The poor financial numbers, primarily, have led to the A.V. Birla group wanting out from the venture. The joint-valuers of the A.V. Birla stake have reportedly recommended a valuation range of Rs 14 - Rs 17 per MRPL share. Consequently, the stock has moved up 20% since the announcement. The acquisition, based on the joint-valuation report, is expected to cost HPCL Rs 4.1 bn.

Although acquiring the 37% Birla stake in MRPL is likely to give HPCL complete control of an additional 9 MMTPA of refining capacity it is likely lead to bleeding in the bottomline. MRPL is expected to post a loss over the next two years, which could adversely impact HPCL's consolidated earnings, to be declared from FY02. Also, the deal is likely to hurt the company's investment ratios (RoI) on unconsolidated basis by an estimated 80 basis points.

In addition, MRPL is reeling under an adverse capital structure with a debt / equity ratio of 7.9x in FY01. The company is in dire need of financial restructuring, which seems to have been relegated to the back seat with one partner wanting out and search for a fresh strategic partner continuing. Assuming no conversion of debt to equity, MRPL requires Rs 37.7 bn to bring down its leverage ratio (debt / equity) to 2:1.

It seems most likely that HPCL will need to pump in additional funds to rebalance the capital structure. Further, MRPL plans to foray into marketing of controlled petroleum products, which is likely to be deregulated by FY02 end. This could add to the financial burden of HPCL. That said, HPCL has stated it is evaluating the report but no decision has been taken.

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