Stock Pick Of The Week: MRPL

MRPL has rightly been punished by the market. Its Q3 FY 2013 results were very poor. It reported a net loss of Rs 360 crore versus a profit of Rs 110 crore in the same Quarter of last year though the net revenue surged was up at Rs 18,760 crore versus Rs 13,650 crore YoY. The GRM slumped to USD 1.89 per barrel versus USD 7.24 per barrel on a YOY basis. The entire FY 2013 results will also be poor.

There have been a series of problems plaguing MRPL. First the ambitious expansion plan has been delayed by nearly 24 months and the costs have surged. Second, it imports crude oil from Iran because that gives the best margin. However, because of the sanctions imposed by the USA against Iran, that source has dried up and MRPL has had to import from more expensive sources, leading to a crunch in the GRMs.

However, most of the problems are reflected in the prevailing price of about Rs. 48. The stock has lost 22% on a YOY basis and 33% over tow years.

The positives are just being ignored by the market. Lets list them.

First, MRPL is a subsidiary of ONGC and so there is no disputing the quality of the management or its understanding of the dynamics of the business.

Second, there is no question that the business of refining crude oil to produce petrol, kerosene etc is per se a profitable one. Essar Oil, India’s second largest private refiner, reported Gross Refining Margin of $9.75 per barrel, for the October-December 2012 quarter (Q3FY13), up 350% compared to $2.82 per barrel in Q3 FY12 reflecting the higher complexity benefits post completion of expansion and optimization projects. Essar Oil’s Vadinar Refinery has 20 MMTPA capacity and 11.8 complexity. The same is the position with other refiners like Reliance Industries.

(MRPL Projections By Nirmal Bang)

Third, MRPL has indicated that commercial operations of the expansion project will be started by September 2013. The effect of the expansion is that the Nelson complexity index will rise to ~10 from 5.0 before the expansion and result in much higher GRMs.

Fourth, the valuations are reasonable. MRPL has a book value of about Rs. 47 and the present market price means that it is quoting at about 1 times book. The stock also offers a dividend yield of about 2.5% which should cap the downside. The present stock price is at a steep discount to the value of other refiners operating in India and their global counterparts.

So, if you have the stomach to buy the stock and just sit tight, you could be well rewarded in the next few quarters.