Investors with a long-term perspective can buy the shares of public sector refiner, Mangalore Refinery and Petrochemicals Limited (MRPL). Attractive valuation and an expansion programme which is close to completion support the recommendation.

During the past year, uncertainty about oil supply from Iran, a weak refining market and heavy foreign exchange losses has been an overhang on the stock. At its current price of Rs 58, the stock discounts its trailing twelve month earnings by around 11.3 times. This is lower than levels it has traded at in the past (14-17 times).

Expansion bodes well

The completion of its Phase III refinery project by the end of the calendar may provide a positive trigger for MRPL. The project is in an advanced stage, with around 95 per cent of the work complete. A major part, including the crude distillation and vacuum distillation units, was commissioned in March 2012. The balance portion is expected to be completed by October this year.

After the expansion, the refinery’s capacity will increase from around 12 mtpa to 15 mtpa, and its complexity will rise from around 6 to 10. This will enable MRPL to process cheaper, heavier crude to produce more value-added products, and improve its gross refining margin (GRM) by around $2-$3 per barrel.

GRM is the difference between the price of the product mix produced by a refiner and the cost of crude oil. MRPL also expects to commission the single point mooring facility by July.

This will reduce its freight costs. The polypropylene unit, which should be ready by December, will give the company a foothold in the petrochemicals space.

MRPL will also benefit from the incentive package announced by the Karnataka government for the Phase III project. Concessions include soft loans, and exemption from entry tax and central sales tax. This should further aid the company’s margins.

Diversifying supply sources

MRPL is among the big importers of crude oil from Iran, which has been subject to economic sanctions. The payment problem pertaining to that country took a toll on the MRPL stock last year.

But alternative settlement arrangements and the US exemption to India have helped the company continue to source supplies without disruption in operations.

To reduce its dependence on Iranian oil, MRPL has been diversifying its supply sources and increasing procurement from countries such as Saudi Arabia.

Rebound in performance

A weak refining market environment for a good part of the last fiscal and heavy foreign exchange losses contributed to MRPL reporting low gross refining margin (less than $4 a barrel) in the first three quarters.

This dragged the company’s financial performance. But GRM improved significantly to $7.07 a barrel in the March quarter, aided by an improvement in refining market conditions and forex gains. Also, there was an increase in output to 3.41 mmt.

This helped MRPL grow March quarter profits by 8 per cent year-on-year to Rs 602 crore. For the full year though, the company’s profits fell almost 23 per cent to Rs 909 crore.

With the global economic environment uncertain, refining margins for the industry may remain muted. But benefits from MRPL’s refinery expansion should provide it support.

The company’s financial position remains strong with debt-to-equity at a reasonable 0.8 times. While rupee volatility remains a concern, steep depreciation from current levels seems unlikely.

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