Impact of rising GRMs on MRPL

Peak maintenance season in the US, declining inventories, supply concerns, and switch to diesel from gas in Industrial, as well as the Transportation sector, has resulted in a sharp rise in petrol and diesel cracks to as high as $2/$48 per bbl. However, average crack spreads remain at $15/18 per bbl for petrol/diesel in 4QFY22 to date as against $13/11 in 3Q and $10/7 in 9MFY22.

The International Energy Agency, in its latest monthly report, has indicated that global refining throughput may be cut by about 1.1mnbopd due to the ongoing Russia-Ukraine crisis. This is likely to keep the demand-supply balance tight till supply eases.

In the last few days, although Singapore's Gross Refining Margin (SG GRM) has touched a high of about $12/bbl, it still averages $7.8/bbl in 4QFY22 to date v/s $ 6.1/bbl in the last quarter. The current rise in the gross refining margins (GRM) is expected to benefit all Indian refiners. Amid various other moving parts, standalone refiners like MRPL and MRL are likely to benefit the most. 

Mangalore Refinery and Petrochemicals Ltd. (MRPL) completed expansion and modernization Capex of about Rs.150b (Phase III) over FY12-15. This included a polypropylene plant as well as Single Point Mooring (SPM) for facilitating the anchoring of Very Large Crude Carriers.

Despite these expansions and modernization, MRPL failed to sustainably improve its performance. As a result, its standalone Balance Sheet worsened with a net debt/equity ratio twice in FY21 from a net cash/equity ratio of 1.1 times in FY16. Acquiring ONGC’s stake in ONGC Mangalore Petrochem (OMPL) raised its consolidated net debt to a staggering Rs. 244b, or a net debt/equity ratio of approx. 7 times.

The reason for its poor performance is since Q1FY13. Since 1QFY13, the refinery has suffered at times due to the inadequate availability of water during the summer season. With the operationalization of the desalination plant in late CY21, the problem seems to be largely taken care of. 

While any performance disruptions due to inadequate water supply are not expected, it remains to be seen if MRPL can take advantage of the current strength in GRMs. Our FY22 financials do not factor in possible inventory gains in the fourth quarter as most of it may be countered by a similar, but slower inventory loss in FY23.

At our base GRM assumption of $6.5/bbl in FY23, the estimate is an EBITDA of Rs.43b. Every $1/bbl change in GRM results in a 25% change in EBITDA. The standalone net debt is expected to fall to Rs.92b in FY23 from Rs.153b in FY21. A $3/bbl improvement in GRM in FY23 will pare down its standalone debt to Rs.80b. 

Mangalore Refinery & Petrochemicals Limited (MRPL) was set up as a joint venture (JV) between the AV Birla Group and Hindustan Petroleum Corporation Limited (HPCL). It is now a subsidiary of the Oil & Natural Gas Corporation(ONGC). The company is mainly engaged in the business of refining crude oil, petrochemical business, trading of aviation fuels, and distribution of petroleum products through retail outlets and transport terminals.