MRPL: Buy



Efforts to resolve the oil-payment row with Iran, an expansion plan ahead of schedule, positive outlook for the refining sector, and the recent sharp fall in its stock price make MRPL an attractive bet for long-term investors. At its current price of Rs 58.6, the stock discounts its trailing 12-month earnings by around 11.7 times. This is lower than the trading multiple of other pure-play refiners such as Chennai Petroleum and Essar Oil, and also below MRPL's own historical-trading range.

MRPL, a subsidiary of Oil and Natural Gas Corporation, imports more than 50 per cent of its crude oil requirement from Iran, and would have been the most affected among Indian refiners had the payment impasse with that country continued. Since the problem arose in late December, the stock has lost close to 19 per cent on the bourses, adding to a cumulative 30 per cent decline since November, thereby making it an under-performer. With India recently resuming payments for crude oil sourced from Iran through a Germany-based bank, the supply uncertainty-related overhang on the MRPL stock should be a thing of the past.

The company is proceeding well on its Phase-III refinery project (physical progress of 72.9 per cent as on January 2011 against scheduled plan progress of 71.4 per cent). The project, which is expected to be completed by October 2011, should see the company's refining capacity increase to 15 million tonnes annually from 11.8 million tonnes currently. In addition to increasing throughput, it will enhance the refinery's complexity levels, helping it improve distillate yield, and process cheaper, heavier crude oil. This should further improve the company's gross refining margin. Other value-added initiatives, such as the polypropylene unit, are also under way.

Surging margins

Like other refiners, an improved demand-supply dynamic and buoyant crude oil prices bode well for MRPL's refining margins. The company's refining margins have rebounded in the past two quarters surging above $6 a barrel. This has helped the company post strong growth in financials, with profit after tax up 57 per cent and 21 per cent respectively in the recent September and December quarters. MRPL's miniscule presence in fuel-retailing also shields it from the under-recovery overhang, which plagues most other public-sector oil companies in the country.



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