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MRPL.: Earnings performance remains poor - Outside View by Luke Verghese

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MRPL.: Earnings performance remains poor
Mar 19, 2013

A mega sized venture with a gross asset base of Rs 311 bn which is forced to underperform due to political expediency

The pluses and minuses of being a PSU

Being a PSU has its maha pluses and minuses. Consider one such benefit. Mangalore Refinery and Petrochemicals Limited (MRPL) has a share capital base made up of equity capital and preference capital. The equity capital totes up to Rs 17.52 bn while the preference capital adds up to Rs 46 m. This latter capital base stood at Rs 92 m in the preceding year. The preference shares are being redeemed in phases. In the context of the total share capital base the contribution of preference share is rather limited. I do not know the original issue value of the preference shares but that is not the real story here. The point is that these non cumulative redeemable preference shares carry an almighty dividend of 0.1% and that too of the non cumulative variety. And guess who subscribed to the issue of the capital--- two premier PSU undertakings, IFCI Limited and, State Bank of Hyderabad. They both had to bail out the issue apparently due to government fiats.

The company is today a subsidiary of Oil and Natural Gas Corporation Ltd. which owns 71.6% of the equity in the stock. Another 16.96% of the voting capital is held by Hindustan Petroleum Corporation Ltd. That makes for a total holding of 88.59%. That is just below the dated SEBI mandated guideline to exit the market. It also infers that the floating stock is rather limited. It was not always like this though. It was initially started as a joint venture between the late Aditya Birla and HPCL as a part of the totally unrelated diversification effort on the part of Birla. But given the rough going over time and the share capital inputs required as a promoter, Birla exited the venture soon enough and the present shareholding pattern came into being. For the matter of record it has a paid up capital of Rs 17.53 bn and reserves of Rs 54.7 bn at year end. The vast bulk of the reserves comprise of sums credited to the 'surplus lying in the P&L account'. Such tricks allow companies to pay out a dividend when there is a lack of post tax profits.

Celebrating its silver jubilee

The company makes do with a large petroleum refinery in Mangalore and the company per se is celebrating the silver jubilee of its incorporation in the current year. It had a capacity to process 12 MMTPA (million metric tonnes per annum) of crude oil per year which has been upped to 15 MMTPA. During the financial year the company achieved a throughput of 12.82 MMTPA, the highest throughput on record. Along with the expansion of the refining unit the company is also setting up a polypropylene plant with a capacity of 440 KTPA. This unit is integrated with the refinery expansion project. The total capital cost is envisaged at Rs 18 bn. The parent also makes do with two joint ventures and three associate companies. It has a direct investment in two of these affiliates and the total book value of the outlay is Rs 150 m. Given the size of the parent this figure would amount to small change by any yardstick.

Besides the company's ability to shove its issue of preference share capital down the throats of reluctant suitors, the other impressive showing is in its ability to manage its finances. Take a look at some of its figures. The trade payables at year end amounted to Rs 111 bn while the trade receivables amounted to Rs 34.6 bn. This is a huge gap and comes in very handy - especially when the company is pushing ahead with some impressive expansion schemes. It sells much more than it buys. The current liabilities at year end at Rs 145.5 bn more than matches the current assets of Rs 120 bn - excluding the cash and bank balances that is.

Some big outlays

The expenditure side got bloated during the year on two counts. The purchase of fixed assets valued at Rs 32.6 bn and the massive growth in inventories by Rs 37.2 bn. The growth in inventories is almost completely on account of the rise in the value of 'raw materials on hand and in transit'. The raw material inventories grew a massive Rs 35.2 bn. Why this should be so is not known but that is the reality of the matter. Was stocking up on crude a prelude to the increase in the refining capacity to 15 MMTPA?

But in any event the company was able to manage increased requirements of cash in the old fashioned way. It generated negative cash of Rs 6.6 bn from operations basically due to the phenomenal increase in the value of inventories. The simultaneous splurge on fixed assets helped to make the position even more difficult. The cash flow from investing activities consequently led to negative cash flow of Rs 29.6 bn. Not surprisingly there was no additional issue of permanent capital during the year. But the company made good the loss by additional raising debt of Rs 46.2 bn. Of the additional borrowings, external commercial borrowings and such like amounted to Rs 21.1 bn, a loan of Rs 26 bn from ONGC, and long term loan of Rs 4 bn from the Oil Industry Development Board to round out the picture. The external borrowings are presumably to pay for the capital goods and are subject to forex fluctuations - which fortunately can go either way. It was quite easy really-ratcheting up the additional debt. In the latest financial year the interest paid on debt amounted to Rs 1.33 bn - but it is difficult to calculate a percentage interest payout given the surge in debt accretals during the year.

Some additional outlays

There will also be an additional debt load during the current year as some more of the capital expenditure on tap gets accounted for in its books. The additional interest costs on this debt load in the current financial year are difficult to guess, but it may be partially offset by debiting the additional interest costs to capital account. Any additional debit to revenue account may however also be nullified by the increased revenues and margins, as the expanded plant goes on stream.

Total revenues net of excise amounted to Rs 538 bn against Rs 388.8 bn previously-a rise of 38.4%. Whether this increase in revenues is volume driven or price driven is not known as quantitative details are not published anymore. But the consumption costs of material inputs-the largest expense item by far-- grew by 40% to Rs 511 bn. With the company taking an additional rap of Rs 6.5 bn against a gain previously (on the exchange rate mechanism) given its large forex exposure, and the 100% hike in finance costs to boot, the pre-tax profit took a hit. The pre-tax fell to Rs 13.2 bn against Rs 17.4 bn previously. Talking of the forex exposure, the company plays big on this count. The total exports amounted to Rs 234 bn against Rs 146 bn previously. (The company says it has a term export contract for the supply of petroleum products to Mauritius). On the other hand the total forex outgo on account of imports etc amounted to Rs 478 bn against Rs 307 bn previously. (It also infers that the export revenues accounted for over 43% of overall net revenues during the year. What is also not known is the contribution of export revenues to the bottom-line). That also makes for a total forex exposure of Rs 712 bn-and this is a big number. This forex flip flop is a cross that the company has to bear, and the export effort appears basically to contain the forex outgo or some such.

Very little to show

For the present the company has very little to show for its efforts. It is making very little money from the sale of petroleum products - but the situation is no different with the rest of the oil industry which is marketing petroleum products directly to the consumer. Incidentally this company has not accounted for any subsidy income in its books-this is odd. This infers that the company is not selling locally directly to the consumer, as PSU oil companies are eligible for a dole from the Govt. for selling subsidised fuel products. The company however claims that it is also engaging in direct sales and that such sales amounted to Rs 25.7 bn against Rs 22.9 bn previously.

Regardless, the company is planning ahead. It intends to set up a linear alkyl benzene plant and has plans to expand its refining capacity to 21 MMTPA at an approximate investment of Rs 85 bn. This investment is however very much in the distant horizon.

As matters stand today there is very little in this share as an investment proposition. But who knows what the morrow will bring about.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme.

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:

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