The rout of crude oil since June last year has taken a toll on public sector oil refiner MRPL. In the December quarter, lower product prices resulted in a revenue decline of about 19 per cent. This, along with a big inventory loss, contributed to the company posting a loss of ₹1,894 crore, among its largest. But this conceals more than it reveals.

Take away the inventory loss, and the company actually showed a marked improvement in its performance.

MRPL’s operating gross refining margin improved sharply to $6.74 a barrel in the December quarter, up from a negative $0.95 a barrel in the year-ago period. This was thanks to completion of the Phase III expansion and up-gradation project in the September quarter.

Rising capacity

The refinery can now process more crude oil, with its capacity increasing from 12 mtpa to 15 mtpa. It can also process cheaper, heavier crude oil due to an increase in the Nelson complexity factor (a measure of efficiency). The refinery’s distillate yield should increase to almost 80 per cent from 76.5 per cent. Cheaper inputs and an increase in the quantity of higher-value products mean better gross refining margins for the company. This benefit will translate into higher profits and profitability in the coming years.

Other benefits too are on the anvil. MRPL is entitled to an incentive package from the Karnataka government for Phase III expansion; this includes exemption from entry tax and sales tax. The polypropylene unit expected to be commissioned soon will give the company a foothold in the petrochemicals business. The recent stake hike from 3 per cent to 46 per cent in ONGC Mangalore Petrochemicals, which is situated next to the Phase III project, will also help.

Inventory losses, which have been the company’s bane in recent times, should abate. Crude oil has almost halved since mid-June, and while it is difficult to predict oil prices, the downside seems limited now. This means that its core operating business, which is set to improve, will drive performance hereon. New business opportunities also beckon.

With diesel pricing deregulated, MRPL, which so far had a very limited presence in fuel retailing, plans to open over 100 retail outlets in the short term.

No cost overruns

There were no major cost overruns for MRPL in the delayed Phase III project. But the big losses in recent quarters have somewhat frayed the company’s otherwise sound financial position; the debt-to-equity ratio has risen to 2 times. However, with expansion projects completed and earnings expected to improve in the coming quarters, the situation should ease.

The MRPL stock, which took a knock from June to December last year, has recouped some lost ground since.

But given its good prospects, it still presents a good buying opportunity for investors with a long-term perspective.

At ₹70, the stock trades at about three times its book value, more than the 2 times or so it had traded at in the past. However, the current high valuation is due to the big losses in the first nine months of 2014-15 that dragged down the book value. Adjusted for this, the stock trades at a reasonable 1.7 times book value, implying there is room for it to rise further.

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