MRPL: Buy :: Business Line

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The beaten-down stock of standalone refiner MRPL presents a good buying opportunity for investors with a long-term perspective. With its much-delayed expansion programme nearing completion, the company’s margins should improve significantly.

Repeated delays in the Phase III expansion programme soured market sentiment on the MRPL stock. Increase in depreciation and interest costs eroded profits. There have been other problems too, such as the period of uncertainty about crude oil supply due to the Iran sanctions issue.

Water shortage in April last year led to a temporary shutdown of the refinery, leading to loss on inventory. The steep volatility of the rupee in recent times resulted in foreign exchange losses. And reports of plans to introduce export parity pricing, which could erode margins, did not help.

Over the last three years, the MRPL stock has lost close to 60 per cent. At the current price of Rs 33, it is close to its 2008 low and trades at 0.9 times book value. This is much lower than the levels it has traded at in the past (five-year price-to-book average is nearly two times).

REACHING CLOSURE

MRPL now seems poised for a turnaround, however. Almost 99 per cent of the work on Phase III expansion is complete and the project is expected to be commissioned this month.

Along with growth in capacity from 12 mtpa to 15 mtpa, the refinery’s Nelson complexity factor (a measure of efficiency) should increase from the current 6 to around 10. This will enable it to process cheaper, heavier crude oil into higher-value end-products.

Overall, the refinery’s distillate yield is expected to increase to almost 80 per cent from 76.5 per cent now. Higher refinery complexity and more high-value products should improve MRPL’s gross refining margin (difference between price of product mix and cost of crude oil) by around $3 a barrel.

Last month, the company commissioned the single-point mooring system off the Mangalore coast. This will reduce freight costs and help the company widen its crude sourcing base. The polypropylene unit which MRPL expects to commission by March 2014 should give the company a foothold in the petrochemicals business.

The full benefits of the expanded business will start reflecting next fiscal onwards. Besides, MRPL is entitled to an incentive package for the Phase III expansion from the Karnataka government. This includes exemption from entry tax and sales tax, and should further bolster the company’s margins.

Often in the past, the company’s core performance was overwhelmed by losses arising from adverse inventory or forex fluctuations. This could be the case in the recent September quarter too, given the sharp currency volatility. But the higher gross refining margin after the expansion should give MRPL the buffer to absorb losses.

CONCERNS HANDLED

The concern about interruption in crude oil imports has eased. MRPL depends on imports for 80 per cent of its oil requirement. It was among the big importers of crude oil from Iran, which has been under economic sanctions for quite some time now.

There were fears of supply shortages due to the sanctions, and issues related to payment mechanisms and shipping insurance. But the company has been able to maintain its supply lines thanks to alternative payment and insurance mechanisms, and by importing more from countries such as Saudi Arabia, Kuwait and the UAE.

Overall, volumes have improved even as dependence on Iran has reduced considerably. MRPL processed 14.4 mt of crude oil last fiscal compared with 12.82 mt in 2012, and its product sale in 2013 was 13.17 mt, against 11.95 mt a year earlier.

Worries about the possible introduction of export parity pricing for diesel and petrol in the domestic market may be premature. Currently, the products are being priced on a trade parity basis (80 per cent weight to import price and 20 per cent to export price). The proposed export parity based pricing measure could significantly impact the financials of oil marketing companies, and does not have the backing of the Oil Ministry. So, its implementation seems unlikely. Also, that MRPL exports close to 50 per cent of its output provides it some hedge.

Unlike public sector oil marketing companies, MRPL is shielded from the under-recovery burden on sale of its products in the domestic market.

This is because the company has a very limited presence in direct retailing of fuels such as diesel, prices of which are controlled. But it does directly sell products where there are no pricing restrictions. It also has a joint venture with Shell for selling aviation turbine fuel.

FINANCIAL POSITION

Despite the delay in the Phase III project, there been no overrun in the estimated project cost of Rs 12,160 crore. The company’s debt to equity ratio, at 0.94 times, remains within comfort levels. Also, except in the last fiscal when it posted losses, MRPL has been consistently profitable and paid dividends (yield between 1.5 to 3 per cent).