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MRPL: Slow and steady progress - Outside View by Luke Verghese
 
 
MRPL: Slow and steady progress

The company was conceived and set up in the days of the license permit raj some 22 years ago. Originally a private sector cum public sector venture, it metamorphosed into a pure play PSU, after the private sector promoter, the Aditya Birla group found, found the going too hot, investment wise, and wisely exited in favor of ONGC. Today ONGC is the dominant shareholder in the prevailing promoter equation with a little over 71% of the paid up equity of Rs 17.5 bn, with the other original promoter, HPCL holding a further 17%. The balance holding of 11.5% is parceled out, and is characterized as public shareholding. Thus the floating stock is a relatively paltry 201 m shares of the face value of Rs 10 each, as compared to the total outstanding stock on tap of 1.8 bn shares. There is also a paid up preference capital of Rs 91 m.

One of the advantages of being a pure play oil refining company is that you do not get enmeshed in the cockide oil politics which the refining cum marketing companies have to endure ad infinitum. The result is that the latter have no clue on whether they are coming or going. The pure refiners on the other hand, since they have some control over the cash flow that they generate, are therefore able to plan their future and carve out a place for themselves under the sun. Mangalore Refineries for example has been progressively increasing the installed capacity of its refinery unit to 11.8 million metric tons per annum (MMTPA). (This expansion on the face of it, however, appears to be a 'naam ke vaaste' entry as the company was already producing at the expanded level of 11.7 million tons (MT) in FY09, when the installed capacity was shown at the old figure of 9.7 MT. As a matter of fact, in FY10, it produced 0.8% less than in the preceding year, when the installed capacity was shown as 11.8 MT! On a rough reckoning therefore, the company appears to be also gold plating its production capacity.) It is now implementing Phase III of the refinery project, which includes updating its production facilities, and will push the refining capacity to 15 MMTPA, at a total capital cost in excess of Rs 100 bn. The additional capacity is expected to come on stream in FY12. A forward integration project to make polypropylene (which will make use of its downstream products as raw material) at a cost of Rs 18 bn is also under implementation and is expected to be commissioned in 2012.

Not content, it is going full steam ahead with the aromatics (benzene based) petrochemicals plant in a joint venture at an estimated cost of Rs 58 bn. This project is expected to go on stream in the first quarter of 2013. Its joint venture partner is none other than its majority shareholder, the cash cow and oil giant, ONGC, though the two together, will be holding a stake of 3% (MRPL) and 46% (ONGC) respectively. That equation however works out to a combined holding of only 49%. There is no mention on who will be holding the balance 51% stake, unless a public issue of capital is planned. (Come to think of it, this shareholding pattern by the two promoters in the new venture is some sort of a comic arrangement. But, then, ONGC is the cash giant in the partnership. At end FY10, MRPL also owed ONGC close to Rs 11 bn, representing loans availed of from the parent.) Why the company has contemplated a new undertaking to implement this project is not known. For, in such an equation, the two promoters will stand to gain only to the extent of the dividends that are declared by the sibling, if and when. Not including the capital outlay that they have to make upfront for starters. The raw materials will naturally be sourced from MRPL. But, it may have very little leeway here in the pricing of the raw material inputs that it will be supplying to the new venture.

The company does have a few sidekick operations, besides the refining that it does. It apparently operates a retail outlet pump or two within Karnataka state. But with the planned deregulation in petroleum product prices, it intends to enter the retail space at some clip. It also has a 'teeny weeny' joint venture with Shell to supply aviation turbine fuel at a number of airports within India.

Presently almost the entire bulk of its revenues emanate from the sales of the downstream petroleum products. Unlike the vast majority of other raw materials, whose prices 'fluctuate' only in the northerly direction, oil prices undergo two way corrections, due in part to 'glocal' oil politics, and the local shenanigans involved in the structuring of oil specific indirect tax levies. So it is not easy to estimate the top line of an oil company on a prospective basis. In FY10 the company refined and sold marginally less petroleum products, than in the preceding year. It sold 11.7 MT in FY10 compared to 11.8 MT in the preceding year. But with a 12.5% drop in the input cost of raw materials, it had a more than down the line effect of a 17% drop in net rupee sales realizations at Rs 319 bn, against Rs 382 bn in the preceding year. This figure comprises exports of Rs 110 bn against Rs 116 bn in the preceding year. That is to say exports accounted for a sizeable 35% of net overall sales. The other peculiar aspect of oil refiners is that they only have a few other revenue expense items, including employee remuneration. Total employee costs amounted to a piddling Rs 959 m or an average salary of Rs 730,000 per employee. In reality therefore the oil refiners actually have it very smooth sailing for them. One wonders why they are so bent on going forward into oil marketing, with all its attendant problems, given the comfort level that they enjoy as oil refiners. Since they sell their produce to the oil marketers, there are no trade debt recovery problems either, and miniscule provisions for bad and doubtful debts. And MRPL also appears to be rather prompt in lapping up its trade debtor dues too. Trade debtor dues averaged just 17 days sales. This is one hell of a 'kush' life in a manner of speaking.

So how did the company fare at the bottom-line level? Given the extent of the forex transactions that oil companies have to make, the gains, or losses on derivative positions becomes an important game changer. Consider the following stats. It imported raw materials to the tune of Rs 262 bn and exported surplus petroleum products worth Rs 110.5 bn. Then there are the other forex transactions on capital account if any. The company booked a forex loss of Rs 6.1 bn in FY09 and a profit of Rs 3.9 bn in FY10.That is a cumulative plus change of Rs 10 bn in the bottom-line in the latter year. On paper the company recorded a pretax profit of Rs 16.9 bn against a pretax profit of Rs 18.1 bn in the preceding year. If one were to restate the figures after erasing these exceptional charges, then the figures turn themselves on their head. Shorn of the theatrics, the pre-tax profit in FY10 would clock in at Rs 13 bn, against a pre-tax profit of Rs 24.2 bn in the preceding year. The fact of the matter is that the company realized less per unit sales in the latter year than in the preceding year, relative to a decline in the input costs. The oil marketing companies have 'chaavied' MRPL nicely, in the latter year, it looks like.

But the company gets top marks for managing with panache its humungous requirements for additional funds. It had to make do with substantially higher demands both on capital and revenue account. In spite of this, the company was able to make do with reduced borrowings. Borrowings at year end declined by Rs 3 bn, in the face of an Rs 14.4 bn addition to capital work in progress, and an Rs 10 bn addition to its investment portfolio for starters. Debtors and inventories grew a cumulative Rs 15 bn while cash resources grew another Rs 5.7 bn! So how did the finance department manage this magic mantra? The company makes it look so simple really. By putting the squeeze on an all encompassing item under current liabilities called 'Due to others'. The dues on this account grew from Rs 29.7 bn to a humungous Rs 62 bn. Wonder who these suckers are. And it should serve as a beacon for other companies who want to finance their burgeoning demands for funds by putting the squeeze on their suppliers. But, conversely, the company could also face the heat if there is a sudden change in the market equation. The wonder here is that by squeezing creditors it not only managed to increase its cash resources, but also added to its free investment portfolio. The yield from the investment portfolio in turn contributed its mite to the 'other income' schedule to the tune of Rs 2.3 bn. This is quite simply a wow performance! One wonders whether there will be a repeat performance in the current year too.

The capacity addition should bring in a large rupee sales increase, but what effect it will have on the bottom-line on the bottom-line is a lot less unclear. The polypropylene unit too will be contributing its mite for sure. However the plans to go 'pell mell' into oil products marketing may turn out to be the game changer in the future.

This company is definitely worth taking a look at

PLEASE NOTE THAT I AM NOT A SHAREHOLDER OF THIS COMPANY

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.

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