MRPL: Refinery Expansion & Complexity To Pump Profits

Mangalore Refinery And Petrochemicals Ltd (MRPL) caught our attention when Anish Jhaveri, CEO, Antique Stock Broking, recommended the stock as his top portfolio pick. Anish Jhaveri said that MRPL, thanks to its massive expansion project underway, was entering into the league of complex refiners with its complexity moving from 5.5 to 9. Anish Jhaveri said that the expansion came on stream, MRPL‘s GRMs would soar and so would the stock price. Anish Jhaveri said that MRPL was at present a “forgotten stock” and investors would do well to get on the bus early before the market wakes to to the stock’s potential. MRPL is at a “defining moment” at present says Anish Jhaveri. Anish Jhaveri gave six reasons to support his recommendation of MRPL as a preferred stock pick:
 

(i) MRPL’s Huge Expansion coming on stream in FY 2012:

MRPL‘s management has conveyed that mechanical completion of the expanded refinery (15 MMTPA) is on track to be achieved in Oct 2011. As on Apr 15, 2011, the project has achieved physical progress of 81% and is scheduled to be commissioned by Jan 2012. The project expenditure so far has been completely met by internal accruals. Going forward, MRPL‘s management has indicated that it will use debt to the minimum extent possible and rely more on internal cash generation. MRPL has indicated that it can take a shutdown of upto 45 days during Sept-Oct 2011 to integrate the new units with the existing refinery. A unit-by-unit commissioning of the expanded refinery will take place starting from Jan 2012, which is expected to take around 3-4 months. The full benefit of the expansion to be visible in FY13 financials.
 

(ii) MRPL’s Refinery Complexity to Increase to 9:

 
MRPL‘s expansion will witness the refinery complexity rising from 5.5 to 9. The higher complexity gives the refinery a higher secondary conversion capacity which will be helpful for maximizing GRM. The expanded refinery will also consist of a 2.2 MMTPA Polypropylene (PP) unit which will mark the entry of MRPL into the petrochemical space.

(iii) MRPL setting up a Single Point Mooring System:

 
MRPL is also setting up Single Point Mooring (SPM) system which will reduce crude transportation costs and would contribute to higher GRM.

(iv) MRPL’s Gross Refining Margins (GRMs) To Increase:

MRPL‘s GRM expected to jump by $ 3/bbl in FY13. With strong demand from the developing world, Singapore GRMs have risen from $ 7.4/bbl in Q4FY11 to $ 8.5-9/bbl currently. Assuming long term Brent crude price is $ 95/bbl and Singapore GRM of $ 6.5/bbl going forward, MRPL is poised to take full advantage of this buoyant refining environment owing to the excellent product slate of its expanded refinery. Increase in light & middle distillate production, reduction in fuel oil output & introduction of PP is expected to result in GRM jumping from $ 6.8/bbl in FY12 to $ 10/bbl in FY13. This may translate into a $ 3.5/bbl premium over the benchmark Singapore GRM in FY13. This is mainly due to the very high realizations for PP (~$ 1500/ton), which is almost double that of other refined products.

(v) MRPL’s Valuations:

 
On MRPL‘s valuations, Anish Jhaveri said that a 12 million tonne refinery going to 16 million tonne refinery was available at a 40% discount to the other standalone refiners like Essar, Reliance or Chennai Petroleum. Anish Jhaveri said that as we neared the completion of the execution of this massive expansion it was only a matter of time that market started reacting and accepting this idea.

(v) MRPL’s low floating stock:

 
MRPL‘s stock is, to the extent of 88%, held by ONGC and HPCL. This concentrated holding augers well for the stock. Only 12% is available as free floating stock.

(vi) MRPL not affected by falling crude prices:

 
MRPL‘s increase in complexity to 9 on the scale means that it will make huge value addition and earn about $20 a barrel from refining diesel. Even if crude oil prices come down, refining margins are unlikely to be hampered. MRPL is today making about $6. By FY-13 MRPL is in a position to make $10. That is the “defining moment” for any company according to Anish Jhaveri.

Anish Jhaveri‘s analysis of the Anish Jhaveri stock is certainly very convincing. We have been investing heavily in the MRPL stock.