Stock Fundamentals


Anand Kalyanaraman | Updated on October 01, 2011


Attractive valuation and refinery expansion are positives.

Investors with a long-term perspective could consider buying the stock of refiner MRPL, an ONGC subsidiary. Along with attractive valuation, the company's refinery expansion plans, which should boost its earnings over the next year, support our recommendation. The MRPL stock after gaining strongly in the first quarter of this fiscal on the back of impressive March quarter results, has tanked around 25 per cent since July-end. This was mainly due to the company's lacklustre show in the June quarter (on a sequential basis) which compounded the effect of jittery market conditions.

MRPL's gross refining margin (GRM) — the difference between the value of the product slate and the cost of crude oil — which was as high as $9.09 a barrel in March 2011 fell to $2.99 in the June quarter. Inventory loss due to volatility in crude oil prices was mainly responsible for the poor show. Still, the company's did better compared with the June 2010 quarter (GRM of $1.97). Consequently, MRPL posted a profit of Rs 173 crore in the June quarter compared to Rs 553 crore in the March quarter and Rs 28 crore in the June 2010 period. At its current market price of around Rs 62, the stock discounts its trailing twelve month earnings by 8.2 times, more expensive than Chennai Petroleum (6 times) but cheaper than Essar Oil (9.2 times). At present levels, MRPL also trades cheaper than its historical average. With many refiners in the West curtailing operations, the refining market environment in Asia is showing an improvement, despite the ongoing uncertainty in the global economy. This should help MRPL's performance in the near-term. That said, the risk that deterioration in the global economic scenario will impact demand for refined products and crimp GRMs, does exist. Also, the company plans a revamp related shutdown of some of its units in the coming months, which could impact earnings in the short-term.

Margins to get a boost

Despite these near-term concerns, the company's ongoing refinery expansion programme, and other initiatives such as the single point mooring (SPM) facility, are long-term positives. Notwithstanding some time overrun due to local protests, there has been good progress (around 86 per cent complete) on the Phase III of the refinery expansion, and the project is expected to be commissioned by January or February 2012.

This should increase capacity substantially from the current 11.8 million tonnes annually to 15 million tonnes. In addition, the refinery's complexity is expected to improve from 5.5 currently to 9, giving the company the ability to process cheaper, heavier crude oil and boost GRM. The expansion will also help MRPL improve its middle distillate yield from around 52 per cent to 63 per cent, which will aid earnings. Other value-added products such as polypropylene will also be produced.

Another project which should improve logistical efficiency and help broad-base MRPL's crude oil supplier base is the ongoing construction of the SPM facility (around 30 per cent complete). The facility expected to be completed by May 2012, will enable the company to receive crude oil in very large crude containers (VLCCs). While MRPL has been able to tide over the oil payment crisis pertaining to Iran (its major supplier currently), it is looking to expand its crude oil basket to de-risk its position.

The SPM facility should aid this cause.

On the retailing front, MRPL has a joint venture with Shell for marketing ATF and directly sells products such as bitumen, furnace oil and naphtha whose prices are not controlled. However, its miniscule presence in the retailing of controlled fuels such as diesel shields it from the under-recovery burden.

Published on October 01, 2011

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