Mangalore Refineries and Petrochemicals Ltd ACMIIL Mangalore Refineries and Petrochemicals Ltd. Background Mangalore Refineries and Petrochemicals Ltd. (MRPL), an Oil refining company was set up in 1988 as a joint venture between HPCL and the Aditya Birla Group (ABG). In 2004 ONGC acquired the share holding to the tune of 72%, thereby making MRPL an ONGC subsidiary. Where as HPCL has equity stake of around 16.95% in the company, and is marketing few of its products. Investment Rationale The global demand for petroleum products grew from 83.7 million barrel per day (mb/d) in FY05 to 87.8 mbpd in FY07 i.e. at a CAGR of 2%. Going forward, demand for petroleum products is expected to increase at the same rate i.e. CAGR of 2% over period of 2006 to 2010, which will be mainly driven by China, India, and the Middle East. (Source: IEA) With the domestic projects coming up, the total domestic refining capacity is set to increase from 145.96 mmtpa in 2007 to 237.95 mmtpa by 2012 creating a net surplus of 91.94 mmtpa. Going ahead the domestic demand for petroleum products is expected to grow at a CAGR of 3.3%, while supply is expected to grow at a CAGR of 7.9 % by 2012 (Source: Crisil). This scenario leads to higher exports opportunity of petroleum products for India. MRPL with its Upgradation and Expansion projects lined up will add capacity of another 5.31 mmtpa from the present level of 9.63 mmtpa by FY11. This project is expected to significantly improve distillate yield by processing high quality crude. Higher demand of quality petroleum products in the international market will generate more revenue from exports. This will lead to higher profitability and better refining margins for MRPL. Change in fuel specification norms to Euro III/IV grade of petrol and diesel would lead MRPL to enjoy better sales and superior margins in the lighter and middle products. Domestic as well as international markets like Europe and US have higher demand for such kind of petroleum product Valuation We initiate coverage on Mangalore Refinery and Petrochemicals Ltd. with a HOLD recommendation with price-objective of Rs.93. We have arrived at a price target of Rs. 93 by assigning multiple of 7x for FY10E EBIDTA considering its international peers. Analyst Dhaval Joshi [email protected]Tel: (022) 2858 3406 18 February, 2008 HOLD Key Data (INR) CMP 89 Key Data Bloomberg Code MRPL IN Reuters Code MRPL.BO BSE Code 500109 NSE Code MRPL Face Value (INR) 10 Market Cap. (INR mn.) 155044 52 Week High (INR) 149 52 Week Low (INR) 32 Avg. Daily Volume 3033022 BETA 1.4 F&O Market Lot 2225 Market Turnover (Rs. Mn) 420 Shareholding % Promoter goup 88.57% Banks/Mutual Fund/FI 1.29% Foreign Institutional Investors 1.16% Individuals/Pvt bodies 8.98% Total 100.00% (Rs. bn) FY08 FY09E FY10E Net Turnover 320.6 347.1 317.7 Operating Profits 25.6 31.6 24.8 OPM (%) 8.02 9.1 7.8 PAT 13.1 16.2 10.8 PATM (%) 4.1 4.7 3.4 EPS (Rs.) 7.4 9.2 6.1
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�Mangalore Refineries and Petrochemicals Ltd ACMIIL
Mangalore Refineries and Petrochemicals Ltd.Background
Mangalore Refineries and Petrochemicals Ltd. (MRPL), an Oil refining company was set up in 1988 as a joint venture between HPCL and the Aditya Birla Group (ABG). In 2004 ONGC acquired the share holding to the tune of 72%, thereby making MRPL an ONGC subsidiary. Where as HPCL has equity stake of around 16.95% in the company, and is marketing few of its products.
Investment Rationale
The global demand for petroleum products grew from 83.7 million barrel per day (mb/d) in FY05 to 87.8 mbpd in FY07 i.e. at a CAGR of 2%. Going forward, demand for petroleum products is expected to increase at the same rate i.e. CAGR of 2% over period of 2006 to 2010, which will be mainly driven by China, India, and the Middle East. (Source: IEA)
With the domestic projects coming up, the total domestic refining capacity is set to increase from 145.96 mmtpa in 2007 to 237.95 mmtpa by 2012 creating a net surplus of 91.94 mmtpa. Going ahead the domestic demand for petroleum products is expected to grow at a CAGR of 3.3%, while supply is expected to grow at a CAGR of 7.9 % by 2012 (Source: Crisil). This scenario leads to higher exports opportunity of petroleum products for India.
MRPL with its Upgradation and Expansion projects lined up will add capacity of another 5.31 mmtpa from the present level of 9.63 mmtpa by FY11. This project is expected to significantly improve distillate yield by processing high quality crude. Higher demand of quality petroleum products in the international market will generate more revenue from exports. This will lead to higher profitability and better refining margins for MRPL.
Change in fuel specification norms to Euro III/IV grade of petrol and diesel would lead MRPL to enjoy better sales and superior margins in the lighter and middle products. Domestic as well as international markets like Europe and US have higher demand for such kind of petroleum product
Valuation
We initiate coverage on Mangalore Refinery and Petrochemicals Ltd. with a HOLD recommendation with price-objective of Rs.93. We have arrived at a price target of Rs. 93 by assigning multiple of 7x for FY10E EBIDTA considering its international peers.
�Mangalore Refineries and Petrochemicals Ltd ACMIIL
Industry Overview
World refining capacity outlook
Several factors will shape developments in the downstream sectors in the coming year. Growing demand for petroleum products indicates that there will be rise in volume of crude oil, which needs to be refined. Due to environmental concerns product specifications are significantly favouring cleaner products that will require considerable reduction in sulphur content as well as improvements on other quality parameters. So going forward the oil product demand structure will shift towards lighter products like LPG, MS and HSD. These challenges can be met only when downstream sector makes substantial investment to set up sufficient distillation capacity.
The world refining capacity has increased at a CAGR of 0.97% from 83.1million barrel per day (mb/d) in 2000-01 to 87.2mb/p in 2005-06. After 2006, a total of 14 mb/p distillation capacity was announced, out of which only 7.4 mb/d of new capacity will be added to the global refining system through to 2012. Almost 70% of new capacity will be located in the Middle East and the Asia-Pacific.
Regionally, the Middle East, India and China are the focus for major refining capacity expansions over the decade, accounting together for almost 8 mb/d of announced projects. While developments in China are mainly driven by local demand and in the case of the Middle East and India, it is a combination of rising demand and the policy goal of turning these regions into major refining and product export centres.
World-Refining capacity and product consumption comparison (mmtpa) Capacity
2005
Demand
2005Differential
Capacity
2010P
Demand
2010PDifferential
North America 956 1,168 -212 993 1,192 -199
South and Central America 383 234 149 430 254 176
Europe & Eurasia 1,235 916 319 1,249 923 326
Middle East 347 279 68 430 356 74
Africa 171 133 38 185 140 45
Asia-Pacific 1,163 1,099 64 1,258 1,226 32
World-Capacity 4,254 3,829 425 4,545 4,090 455Note: demand excludes Natural Gas Liquids (NGL) production.Source: Oil and Gas Journal and IEA
70% capacity addition from Middle East and Asia Pacific
regions
(Source: OPEC (world Oil Outlook 2007)
�Mangalore Refineries and Petrochemicals Ltd ACMIIL
In 2005, the global refining capacity stood at 4254 million metric tonnes per annum (mmtpa) as against product demand of 3829 mmtpa that reflects a surplus situation. Only in the region of North America a clear deficit is visible. Going forward as well the situation is that of surplus except for the region of North America. We have mentioned below the countries having deficit in capacity in relation to demand.
World Refining capacity and Demand. (2005, mb/d)Country Capacity Demand Deficit
USA 17.1 20.8 -3.7
Japan 4.71 5.35 -0.64
Canada 2.02 2.29 -0.27
Spain 1.27 1.6 -0.33
China 4.65 6.77 -2.12
Mexico 1.68 2.08 -0.4
Brazil 1.92 2.1 -0.18Source: Energy Information Agency (EIA)
The demand of the petroleum products is also met by Natural Gas Liquids (NGL), other hydrocarbons, and oxygenate, which does not require refining. It means that still there is demand of actual petroleum products, which is not fulfilled by the existing refineries. This demand can only be met through imports of petroleum products. The demand for petroleum products is highest in the US, followed by China, Japan and South Africa.
India is the fifth largest petroleum refining country (19th position in 1995) with a share of 3% of global capacity (Source: BP Energy statistics). Africa is the fastest growing market for India’s exports, followed by Latin America, Europe and East Asia. whereas France, Belgium, United Kingdom, China, Singapore, Korea, and Hong Kong emerged as the major markets for India’s exports.
India’s Refinery Scenario
India’s refining sector is dominated by the public sector, accounting for 72% of the total annual refining capacity of approximately 146 (mmtpa). Such capacity is spread across 18 refineries. The balance 28% market share is held by the private sector, which is dominated by Reliance Industries Ltd. (RIL), which accounts for 22.6% of the national refining capacity. Indian oil and gas industry by size as on 2005-06 is estimated at US$ 110bn in 2005-06 (Source: India Brand Equity Foundation).
India is 5th largest petroleum refining country
�Mangalore Refineries and Petrochemicals Ltd ACMIIL
Existing Refining Capacity and its market ShareCompany Location Capacity
(mmtpa)Actual Throughput during
2006-07 (mmtpa)
IOC Guwahati 1.0 0.84
Barauni 6.0 5.47
Koyali 13.7 12.95
Haldia 6.0 5.84
Mathura 8.0 8.88
Digboi 0.7 0.59
Panipat 12.0 9.47
Total 47.4 44.04
CPCL Manali 9.5 9.78
Narimanam 1.0 0.62
BRPL Bongaigaon 2.4 2.07
Total-IOC 60.3 56.51
BPCL Mumbai 12.0 12.03
KRL Kochi 7.5 7.74
NRL Numaligarh 3.0 2.50
Total- BPCL 22.5 22.27
HPCL Mumbai 5.5 7.42
Visakhapatnam 7.5 9.37
Total 13.0 16.79
ONGC (MRPL) Tatipaka 0.08 0.09
Manglore 9.7 12.54
Total- ONGC 9.78 12.63
Reliance Jamnagar 33.0 36.62
Essar Oil* Vadinar 7.5 1.76
Total 145.96 146.55*Being expanded to 10.5 mmtpa, Source: Indian Infrastructure
India’s Refinery Market Share (2006-07)
(Source: Indian Infrastructure)
�Mangalore Refineries and Petrochemicals Ltd ACMIIL
India’s Trade Scenario
Demand Scenario and its outlook
In the last few years, India has become net exporter of petroleum products due to various initiatives taken by the Government. Demand for petroleum products has increased at a CAGR of 2.4% from 104.1mmt in 2002-03 to 111.9 mmt in 2005-06 and is expected to grow by 3.3% annually during the Eleventh Plan period to about 139.2mmt by 2012. The main demand drivers have been LPG, MS, ATF, HSD, Naphtha and Bitumen, which accounts for nearly 79% of the total consumption of petroleum products. The major sectors contributing to this growth were Power, Fertilizer, Aviation, Automobile and Transportation. Even in the long run these sector are expected to drive the demand of petroleum products. The following detail shows the overall scenario of petroleum products from last four years.
(mmtpa)
(Year) Production Exports Imports Consumption
2002-03 104.1 10.3 7.2 104.1
2003-04 113.4 14.6 8 107.7
2004-05 118.5 18.2 8.8 111.6
2005-06 119.7 21.5 11.6 111.9Source: Indian Infrastructure
Domestic growth driver of petroleum productionProduct Growth driver
Heavy distillates 28.2 29.2 30.4 31.5 32.5 33.7 3.6%
Others 12.0 12.4 12.7 13.1 13.5 13.9 3.0%
Total Consumption 118.3 121.7 123.2 129.9 133.3 139.2 3.3%Source: Crisil research
Supply Scenario and its outlook
Refining projects proposed during the Eleventh Plan period
The expected refining margin as well as per tonne capital cost of a refinery become the key deciding factors for venturing into a new project. Indian economy growing at 8.5-9% many domestic players have planned their capacity expansion to match to the country’s growing economy. Refining capacity is set to increase from 145.96mmtpa
Net Exporter of petroleum products and growing at CAGR
of 2.4%
Expected capacity addition to 237.95 mmtpa by 2012
�Mangalore Refineries and Petrochemicals Ltd ACMIIL
to 237.95mmtpa by FY2012 due to various projects linded up in the country. Such capacity additions are expected to churn more quantity of petroleum products in domestic market and excess production is expected to be exported.
Particulars Capacity (mmtpa) Cost(Rs million) Cost (Rs per tonne) Expected Date of Commissioning
HPCL, Mumbai 2.4 10,000 4,167 2007-08
CPCL, Manali 1.7 3,000 1,765 2008-09
IOC, Panipat 3 8,060 2,687 2008-09
RPL, Jamnagar 27 270,000 10,000 2008-09
IOC, Haldia 1.5 6,910 4,607 2009-10
BPCL, Kochi 2 25,918 12,959 2009-10
MRPL, Mangalore 5.3 79,430 14,959 2010-11
HPCL, Vizag 6.7 27,000 4,048 2010-11
HPCL, Bhatinda 9 132,567 14,730 2011-12
BPCL, Bina 6 103,780 17,297 2011-12
IOC, Paradip 15 150,000 10,000 2011-12
NOCL, Cuddalore 6 40,000 6,667 2011-12Note: The List of projects is indicativeCapital expenditure for some of the projects includes non-refinery capex like pipeline, petrochemical unit, etc.Source: Crisil Research
Total Supply of Petroleum Products
India’s export of petroleum products has been increasing, whereas domestic demand growth has been slower in relation to new capacity additions. This trend of capacity additions is likely to continue in the future as well, as demand for petroleum products is expected to grow at a CAGR of 3.3% while supply is expected to grow at a CAGR of 7.9 % in next five years (2006-07-2011-12). Thus creating a net surplus of 60.2 mmt in 2011-12 (see the table below). This will mandate to increase export of petroleum products from the present level of 21.5 mmt in 2005-06.
�Mangalore Refineries and Petrochemicals Ltd ACMIIL
Refinery utilization rates (2006-07)
Overall capacity utilization of the industry has increased to 100.4% in FY 2006-07 as compared to 98.7% in FY 2005-06. ONGC (MRPL) and HPCL have increased their operating rate to 129.1% and 129.2% respectively in FY2006-07 the highest in the industry. While IOC and Essar Oil operate below the industry average of 93.7% and 23.5% respectively. To meet the demand of the petroleum Products, the Company operates at full capacity utilization and effectively caters to the demand of international market through exports.
(Source: CRIS INFAC)
�Mangalore Refineries and Petrochemicals Ltd ACMIIL
Business Overview
Mangalore Refineries and Petrochemicals Ltd. (MRPL), is a subsidiary of Oil and Natural Gas Corporation (ONGC), with a total crude oil refining capacity of 9.69 mmtpa. It was the first refinery in India to produce MS (Petrol) and HSD (Diesel) to meet the Euro-III norms. Euro norms is the vehicular emission standard proposed by the Union government for the auto-fuel policy launched in the country for improvement of air quality. MRPL has 8% share of the total domestic refining capacity of 146 mmtpa.
MRPL’s Product profile:
MRPL’s products are mainly in the middle and light distillate category like Motor Spirit, HSD, LPG, SKO, Naphtha, and ATF. MRPL’s product portfolio comprises mainly of middle & light distillates categorized crude product. As middle and light product enjoy better margin than heavy distillate products.
(Source: Company)
First refinery in India to meet EURO III norms
Focus in middle and light distillate products
�Mangalore Refineries and Petrochemicals Ltd ACMIIL
We observe from the above chart that HSD, ATF, FO, Naphtha, and MS have highest proportion in turnover with 49.94%, 6.84%, 10.74%, 13.52%, and 6.6% respectively. Going forward we expect that light and middle products will contribute to the revenue in a major way.
Key Strengths
In 2006-07, the Company achieved highest ever refinery crude throughput at 12.54 mnt with a capacity utilization of 129.1%. At this utilization level, the company stands at second position when compared to industry average of 97.6%. We believe that till the upgradation and expansion project comes online, the throughput level would remain the same at 12.54mmtpa. till that time company will maintain its capacity utilization level to 129%.
Particulars 2004 2005 2006 2007
Installed Capacity (mmt) 9.69 9.69 9.69 9.69
Throughput (mmt) 10.5 11.85 12.12 12.54
% Change 45.8 12.9 2.3 3.5
Production (mmt) 9.4 11.1 11.3 11.7
% Change 40.4 17.9 2.3 3.4
Capacity Utilisation (%) 108% 122% 125% 129%Note: Capacity utilization is calculated on installed capacity by dividing throughput.
In FY2006-07, the Company has achieved highest ever refinery throughput and production of 12.54 and 11.71 mmtpa respectively with a total fuel loss of 6.6%. Over the period the Company has increased its throughput level from 7.35mmtpa in FY03 to 12.54mmtpa in FY07 and reduce its fuel loss from 7.7% in FY03 to 6.6% in FY07.
(Source: Indian Infrastructure)
129% capacity utilization level
�0Mangalore Refineries and Petrochemicals Ltd ACMIIL
Broader Customer Base
MRPL sells its products to HPCL, IOC, BPCL, HPCL, IBP and Indian Railways for supplying diesel. Besides, MRPL has signed long-term contract with State Trading Corporation (STC), Mauritius for supplying 1mmtpa of petroleum products for 3 years. At present, MRPL is the sole supplier for all the 30 depots of Bangalore Municipal Transportation Corporation.
Higher refining margins as compared to Singapore benchmark
Increase in crude oil price over the years has improved the price realization of the petroleum products. Better operating efficiency and better product mix also contribute towards higher refining margin from $3.16/bbl in FY04 to $4.79/bbl, which is in line with the Singapore GRM. Going ahead we believe MRPL’s GRM would be in line with Singapore GRM till the upgradation and expansion project of its refinery.
(Source: IEA & CRISIL Research, Company)
Increase in thruput level to 12.54mmt in FY07
Better Product Mix and Operating efficiency has
increased refining margins
(Source: Company)
��Mangalore Refineries and Petrochemicals Ltd ACMIIL
Key Initiatives
ONGC and HPCL have entered into a Memorandum of Understanding for product sale-purchase and also for providing infrastructure services and co-operation in energy and related fields for a period of 4 years. This will facilitate greater evacuation of petroleum products and marketing of MRPL products by HPCL in the domestic market. This will lead to assured and higher domestic sales.
The Company is setting up retail outlets to take advantage of direct marketing. At present the Company is working on 15 retail outlets in three Southern states of Karnataka, Andhra Pradesh and Tamil Nadu, which will be operational by March 2008 under the brand name of HiQ, while long-term goal is to set up 500 retail outlets across India.
MRPL has obtained approval from Ministry of Petroleum and Natural Gas for direct marketing of Aviation Turbine Fuel (ATF) to airlines. In order to encash the marketing margins, MRPL and Shell has decided to market international aviation fuel directly to domestic and international airlines for which discussions with various airlines are in an advance stage. This will add more sales of ATF in domestic market.
Expansion/Growth Plan
Isomerisation & Mixed Xylene Projects
In India government-run crude oil refineries such as IOC, HPCL and MRPL have invested around Rs. 300.0bn to meet the EURO IV quality standards and are on track to meet the deadlines set for them. The Isomerisation Project will help the company to produce Euro IV grade petrol and diesel in India with an estimated cost of Rs. 2.34bn. There is a huge demand for Euro IV grade in Europe and United State of America.
MRPL is planning to expand its Refinery Up gradation-cum-Capacity-Expansion project (from the present 9.69 mmtpa to 15 mmtpa), involving a capital expenditure of Rs.79.4 bn, which will be financed through debt of Rs. 53 bn and internal accruals of Rs. 27bn. The Company has appointed Engineers India Ltd. as Project Management Consultant for this project. This upgradation cum expansion will not only lead to higher production but also to better yield and improved product mix. Once this project is complete, MRPL’s refinery complexity and refining margins will be comparable with the best refineries.
Refinery largely depends on availability of crude oil. MRPL is in the process of signing an agreement with Cairn India Ltd. and State Government of Rajasthan for greater availability of domestic crude oil with reasonable price as well as for fiscal incentives from state government.
The Company has promoted a SPV with ONGC called ONGC Mangalore Petrochemicals Ltd. (OMPL) for implementing the Aromatics Project, which is estimated around Rs. 48.5bn to produce paraxylene, a value added product.
Expansion of refinery with a capex of Rs. 79.4 bn
��Mangalore Refineries and Petrochemicals Ltd ACMIIL
Key Concerns
Price volatility: Crude Oil and Petroleum products are globally traded commodities and its prices are also linked with international price. The price of the Crude Oil and petroleum products depend on the demand-supply scenario of international market and geo political uncertainties etc. Any change in the above scenario will affect the overall profitability of the company.
Higher Interest cost: As the Company is raising Rs.53 bn for Capex, hence increase in interest cost has depreciated PATM from 4.7% in FY09 to 3.4% in FY10.
Peer comparisonParticular
Net Sales (Rs. bn)
FY07
OPM (%)
FY07
NPM (%)
FY07
ROCE (%)
FY07
MRPL 2,85.6 5.82 1.62 24.07
Chennai Petro. 2,47.1 5.31 1.92 22.52Source: Capitaline
MRPL has achieved net sales of Rs. 285.6 bn in FY07, and also enjoying better Operating margins and ROCE as compared to its peer group to 5.81% and 24.07% respectively.
Higher Utilisation level
The higher utilization level of plant has enabled MRPL to register higher revenue as compared to CPCL in FY07, inspite of having lower installed capacity (as can be seen in the chart given above). Further, higher utilization level has also enabled
(Source: Company)
��Mangalore Refineries and Petrochemicals Ltd ACMIIL
MRPL to obtain higher margins relative to the CPCL in FY07.
Due to change in fuel specification norms to Euro IV grade MS and diesel, there is a higher demand of these products in domestic as well as in international market. To grab this opportunity MRPL has already started production of Euro IV grade MS and diesel where as CPCL will commence the production of Euro IV grade fuel after 2009.
Financials
Net sales have grown at a CAGR of 2% from Rs. 113.9bn in FY04 to Rs. 286.3bn in FY07. Increase in sales is mainly attributable to increase in production of petroleum products as well as increase in price of crude oil.
We expect the Company’s sales to grow at a CAGR of 3.5% from Rs. 286.8bn in FY07 to Rs. 317.8bn in FY10E. We expect a minor dent in the company’s sales in FY10 as compared to FY09. This is due to our assumption of subduing crude prices.
We have assumed crude to trade at $84 per barrel in FY10 in comparison to present level of $91 per barrel.
Operating margin
Operating profit margins has declined over the years from 10.33% in FY05 to 5.3% in FY07 due to increase in raw material cost (crude oil price) as a percentage to sales.
(Source: ACMIIL Research)
(Source: ACMIIL Research)
��Mangalore Refineries and Petrochemicals Ltd ACMIIL
Going forward we expect operating margin to increase from 5.33% in FY07 to 7.83% in FY10 as we expect that price of the crude will increase to $88p/b in FY09 and $84 in FY10. Further reduction in the crude oil prices may show fall in the operating margins to 7.83% in the FY10.
Capex: MRPL is planning to expand its Refinery Up gradation-cum-Capacity-Expansion project (from the present 9.69 mmtpa to 15 mmtpa), involving a capital expenditure of Rs.79.4 bn. The cost of these projects are not the part of our projections.
Surplus/Deficit {After utilizing spare capacity of OPEC} -1.02 0.99 1.78 3.58Source: Energy Information Agency (USA), ACMIIL Research.
In 2007 the average crude price was traded at $72 per barrel while the world demand of crude was 85.58mb/d against the total supply of 80.26 mb/d, leading to deficit of 5.32mb/d. In 2008 EIA expects crude oil price to trade at $87 per barrel and $82 per barrel in 2009 after considering its demand and supply scenario. Based on the similar expectations we expect the crude oil to trade at $84 per barrel.
Sensitivity Analysis
With our assumption of crude price trading at $84 per barrel in FY10, various scenarios for crude oil price and its effect on company’s earnings have been analyzed.
(Source: ACMIIL Research)
��Mangalore Refineries and Petrochemicals Ltd ACMIIL
Financial Comparison of MRPL with Peers Industry Growth MRPL
Year Crude Oil Price (% Change)
Average Sales Growth (% Change)
OPMG (%Change)
NPMG (%Change)
Sales Growth (% Change)
OPMG (%Change)
NPMG (%Change)
1996 19.7 13.4 -8.5 37.3 NA NA NA
1997 -6.4 24.3 10.1 13.7 NA NA NA
1998 -30.1 -4.5 -6.4 -53.8 16.8 -24.8 -73.2
1999 34.1 36.1 0.8 -24.6 77.3 -62.6 -72.1
2000 56.8 86.8 4.0 -63.2 31.1 -96.4 -1725.0
2001 -14.2 1.1 154.7 -115.1 -12.8 905.4 -29.2
2002 0.7 32.6 -15.2 -35.7 94.9 3.7 -12.8
2003 18.6 22.7 22.2 115.7 50.5 -13.0 -13.0
2004 34.5 22.0 12.4 -35.7 38.6 63.6 -180.5
2005 36.0 29.8 3.9 -23.9 63.2 60.7 17.3
2006 16.8 NA NA NA 34 -41.8 -57.8
2007 9.2 NA NA NA 14 42.2 41.4(Note: Industry includes Some of the international and Domestic companies like IOC, BPCL, HPCL, RIL, MRPL, Valero Energy, Formosa Petroche. ,Nippon Oil Corp.,PetroChina Co., Cheveron Corp., Petrobras.)NA: - Data not available, OPMG: Operating Profit Margin Growth, NPMG: Net Profit Margin Growth(Source: Bloomberg, ACMIIL Research)
Crude oil prices and product mix of the industry are two major factors in determining the revenues and profit margins of the refining companies. The revenue and margins are positively correlated with the prices of crude oil i.e. with rise in prices of crude oil both revenue and margins may increase and if prices fall then vice versa.
The higher operating efficiency with better product mix, lined with the high crude price drives MRPL’s profitability.
Valuation
We have considered two valuations method to value MRPL.
1. EV/EBIDTA
2. Assets Replacement Method
EV/EBIDTA
We have considered EV/EBIDTA to value MRPL.
Global Companies EV/EBIDTA (FY10E)
Valero Energy 5
Formosa Petroche. 13
Nippon Oil Crop. 7
Average 8.33 Source: Bloomberg Brokers Consensus
��Mangalore Refineries and Petrochemicals Ltd ACMIIL
Particular EBIDTA (FY10E) Multiple assigned Price
EV/EBIDTA 26475.87 7 93Source: ACMIIL Research
International players are trading at an average EV/EBIDTA multiple of 8.33x for FY10E. Considering MRPL being a standalone refinery company, while international players being integrated (Refinery and marketing co) we have assigned a multiple of 7x to arrive at a target price of Rs.93.
Assets Replacement Method
MRPL (Rs. mn)
Replacement cost 17000.0
Capacity 9.7 (mmtpa) 164730
Less: Debt 23683.0
Current replacement value 141046.9
No of shares 1752.9
Value per share 80.5Source: ACMIIL Research
We have considered BPCL’s current expansion plan for replacement cost (Rs.17000mn per tonne) and we arrived at a price of Rs. 80.5.
Based on above mentioned valuation and concerns associated with Mangalore Refinery and Petrochemicals Limited, we recommend a HOLD.
��Mangalore Refineries and Petrochemicals Ltd ACMIIL
��Mangalore Refineries and Petrochemicals Ltd ACMIIL
Process
Crude oil is a complex mixture of hydrocarbons and contains relatively small quantities of other materials such as oxygen, nitrogen, sulphur, salt and water. Crude oil in its raw form useless as a mixture, to extract the maximum value from it, it has to be refined into other products.
For getting a maximum value from the crude, it has to pass through the crude distillation unit. Crude distillation unit separates crude oil into fractions at different boiling range. At Each and every boiling range different variety of product is collected such as light, middle, and heavy distillates product. Light product requires low temperature of around 40C to 205C. Middle product requires a temperature of 205C to 350C where as heavy product requires high temperature of 350C to 600C.
When one barrel of crude oil is refined, will contain following products:
Heavy Distillates: Furnace Oil (FO), Bitumen, and Lube Oils (LO)
Middle Distillate: High Speed Diesel (HSD), Superior Kerosene Oil (SKO), Aviation Turbine Fuel (ATF)
Light Distillate: Liquefied petroleum gas (LPG) and Motor Spirit (MS), Naphtha
To understand the diversity contained in the crude oil, and to understand why refining crude oil is so important, please look through the products listed below that is derived from the crude oil:
Products Boiling Range Usage
Petroleum gas 40C Used for heating, cooking, making plastics
Naphtha or Ligroin 60-100C Petrochemical feedstock
Gasoline 40-205C Domestic heating fuel
Kerosene 175-325C Fuel for jet engines and tractors
Gas oil or Diesel 250-350C Automotive fuel
Lubricating oil 300-370C Used for motor oil, grease, other lubricants
Heavy Gas or Fuel oil 370-600C Used for industrial fuel
Residuals fuel oil 600C Coke, asphalt, tar, waxes
Types of Crude Oil
Sour crude Oil: It contains the impurities like hydrogen sulfide (H2S) and carbon dioxide, or mercaptans. All crude oil contains some impurities. When the total sulfide level in the oil is > 1 % the oil is called “sour”.
Sweet Crude Oil: It contains small amounts of hydrogen sulfide and carbon dioxide. Petroleum is considered “sweet” if it contains less than 0.5% sulfur compared to a higher level of sulfur in Sour crude oil.
Brent Crude Oil: Brent blend is a light crude oil, contains approximately 0.37% of sulphur, classifying it as sweet crude.
Indian Basket of Crude Oil
India’s crude oil basket comprises Oman-Dubai sour (high sulphur) grade crude and Brent dated sweet (low sulphur) crude in the ratio of 59.8:40.2.
ANNEXURE I
�0Mangalore Refineries and Petrochemicals Ltd ACMIIL
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1. Analyst ownership of the stock NO
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