MRPL - Oil Is Well

One of the events that have dominated the world map right from the beginning of 2011 is the political uproar in the Middle East and North African region. The fallout of the event was a sudden and steep rise in the price of crude oil. However, it has had a silver lining too. Stand-alone refineries like Mangalore Refinery & Petrochemicals (MRPL) are amongst the prime beneficiaries of the rising crude prices. This is reflected in the latest quaterly results of MRPL, wherein it has posted a topline increase of 42 per cent and a bottomline of 118 per cent on a yearly basis. However, this is not the only reason why we are recommending this scrip. There are other compelling reasons such as the expansion and de-bottlenecking activities that the company has undertaken which will help it to maintain the growth momentum. The icing on the cake is that the company has been consistently paying dividend for the last six years and this year it paid Rs 1.2 per share, providing a dividend yield of 1.7 per cent.

MRPL has undertaken the third phase of its refinery upgradation and the expansion project for its Mangalore refinery that will increase its capacity from 12 MMTPA at present to 15 MMTPA by December 2011. Almost 81 per cent of this project has been completed and it is expected to be commissioned by Q4FY12. The project expenditure so far has been met from internal accruals. After the completion of the project, the Nelson complexity of the refinery is slated to increase from 5.5 to 9.0. Refineries that are higher on the Nelson Index are valued higher as compared to their peers because of their ability to refine lower quality crude oil and produce end-products of higher value.

Post upgradation, MRPL will be in a position to produce approximately 60 per cent of middle distillates and 21 per cent of light distillates, taking its total distillate yields to 80 per cent from its current level of 73 per cent. In addition to this, a SPM (single point mooring) facility is also being planned in the Mangalore Port area in order to receive crude in very large crude carrier (VLCC) tankers that will save the freight cost for MRPL. The expanded refinery will also consist of a 2.2 MMTPA petrochem-fluidised catalytic cracking unit (PFCCU), which will mark the entry of the company into the petrochemical space.

MRPL this time has surpassed street estimates and reported impressive results for Q4FY11. Its topline increased by 42 per cent on a yearly basis and was Rs 12,471 crore. This was primarily due to the rising product prices and a better throughput. The rising product prices helped it to increase its GRMs from USD 5.3 per barrel (Q4FY10) to USD 9.1 per barrel (Q4FY11).  During the same period its throughput increased from 3.06 MMT to 3.37 MMT. The net profit has increased by 118 per cent and was Rs 552.86 crore. Even after incurring such a huge capex, the company’s debt to equity ratio is at a comfortable level of 0.36, giving it a leeway to leverage its balance-sheet for the completion of the remaining project cost. Currently MRPL trades at Rs 71.6, discounting its last 12-month earnings by 10.67 times and has an EV/EBITDA ratio of just 5.2 times. Looking at the rising demand of crude products, enhanced product mix and attractive valuation, our recommendation to investors is to take an exposure to the counter.