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MRPL on a recovery path

Hemangi Balse | October 11, 2003

In the mid '90s, when Mangalore Refinery and Petrochemicals Corporation was commissioned on a 1,400 acre plot at Kuthethoor near Mangalore, two identical bungalows were constructed near the plant.

They were for its two joint managing directors representing its two promoter companies -- the A V Birla Group and Hindustan Petrochemicals Corporation Limited.

Over the years, as the fortunes of the Rs 8,058 crore (Rs 80.58 billion) MRPL nose-dived and the promoters lost interest, the bungalows stayed empty and neglected.

But now, MRPL has had a new promoter -- the Rs 34,738.50 crore (Rs 347.38 billion) Oil and Natural Gas Commission. And the company's fortunes are slowly changing. One sure sign: one of the bungalows has been refurbished.

Was it vision or just a change in circumstance? One way or another ONGC has done what both the Birlas and HPCL couldn't do -- make MRPL fleet-footed.

Efforts are on to slash costs at every turn and bring a new marketing focus to a company, which with accumulated losses of Rs 412 crore (Rs 4.12 billion) and underutilised capacity was lost in the now defunct Board of Industrial and Financial Restructuring heap.

 "When we looked at MRPL we realised that it was not difficult to turn it around. All it needed was infusion of cash and streamlining of management," says Subir Raha, chairman & managing director, ONGC.

With a refinery capacity of around 10 million tpa, MRPL produced not more than 6 million tpa. That the company lacked a clear vision was obvious.

While MRPL was struggling to survive with its refinery, Reliance Industries successfully commissioned a refinery with an installed capacity of 27 million tonnes per annum (mtpa) at Jamnagar in Gujarat. The latter also clocked profits within the first year of operations.

"But MRPL was not going anywhere, as both the partners had agreed to disagree," says an oil industry analyst.

Both the Birlas and HPCL wanted to be in the driver's seat and were willing to buy the other out but could not agree at a price.

Finally in March 2003, an exasperated Kumar Mangalam Birla, chairman Birla group, offloaded his entire 37.38 per cent stake in MRPL to another state-owned oil company, ONGC. All this for a meagre Rs 59.43 crore (Rs 594.3 million) at Rs 2 per share.

HPCL refrained from selling its stake but agreed to transfer management control to ONGC. Earlier, it was co-managed by both the promoters.

Over the next six months, ONGC pumped in Rs 600 crore (Rs 6 billion) and restructured MRPL's Rs 5,500 crore (Rs 55 billion) debt (which pushed its equity to 71.62 per cent) and drew up a major plan to rejuvenate MRPL. It now plans to buy out HPCL as well.

In less than six months since it converted MRPL into its subsidiary, it has rejuvenated the refinery. ONGC hopes to reduce the losses to Rs 188 crore (Rs 1.88 billion) by this fiscal end.

"In fact, MRPL's glitches were not major going by the pedigree of its promoters," say oil analysts.

Its problems arose due to its high cost debt, inability to sell products like middle and heavy distillates in the domestic market resulting in distress sale in the export market.

Lack of cash flow resulted in financing of crude purchases through extended credits organised by US oil major Chevron Texaco which was charging higher interests rates.

Then, through Indian Oil Corporation, it signed a contract to import 5 mtpa of crude from National Iranian Oil Company. It was yet another noose.

MRPL not only paid interests on financing of crude purchases, it also paid IOC a canalisation fee, adding to its costs.

While MRPL managed to sell 4 mtpa in the domestic market, it exported naphtha and fuel oil at a discount. It occasionally did the same with diesel and aviation turbine fuel. As a result, it was forced to underutilise capacity.

Raha's first job was to convince the ministry of petroleum & natural gas about how MRPL would be a perfect fit. This was not difficult.

Globally, most oil companies are fully integrated from exploration to marketing. MRPL would only enhance ONGC's equity.

"We were looking at entering the downstream marketing business as a means to capture the value chain. We had initiated discussions with the government to permit us to set up retail outlets. So acquiring a refinery would ensure that we don't have to run around for products," says Raha.

So what is ONGC doing right that the earlier promoters didn't? ONGC's blueprint for MRPL attacks issues on financial, marketing and technology fronts.

All outstanding payments to suppliers of crude including IOC were cleared immediately to save on interest. It did not renew the contract with Chevron Texaco for crude, thus saving 3 cents a barrel.

Even spot purchases of crude were stopped. This brought about a stability in feedstock prices and all purchases of crude were converted to term contracts.

Besides, ONGC leveraged its negotiating skills and directly struck deals with major suppliers like Saudi Aramco, National Iranian Oil Co, ONGC and ONGC Videsh to save on canalisation costs.

It also allocated Mumbai High crude, enabling MRPL's refinery to cut a good mix of crude. This ensured a mix of sweet and light crude resulting in high value middle distillates. ONGC-Videsh's imported equity crude in Sudan was also allocated to MRPL.

Once the feedstock was in place, the new management shifted its focus to optimise refinery capacity. ONGC used its clout with the ministry to lift the cap on MRPL's refining capacity from an average of 6 mtpa to 9.69 mtpa. Then it began targeting the export market seriously.

The accent was on building confidence on both quality and quantity parameters and adhering to delivery schedules and offering better prices.

MRPL's exports last fiscal shot up 622 per cent to Rs 1,913 crore (Rs 19.13 billion) from Rs 265 crore (Rs 2.65 billion) in fiscal 2002. Now, in the first half alone, exports are expected to touch Rs 1,525 crore (Rs 15.25 billion) compared to Rs 692.25 crore (Rs 6.92 billion) in the corresponding six months last year.

Furnace oil, low sulphur high speed (LSHS), naphtha which were exported as part of a distress sale earlier are now sold to IOC on a long term contract, further reducing losses.

MRPL also started direct marketing of furnace oil, LSHS and bitumen for higher ex-refinery margins.

On the financial front, ONGC provided MRPL with a comfort letter for working capital loans at much cheaper price.

Raha says, "The ONGC Board is considering an MRPL loan proposal for full repayment of outstanding loans from institutions and banks and thereby reduce the interest burden."

These efforts have prompted rating agencies to upgrade MRPL's rating to A+. This has helped it further slash the cost of borrowing.

ONGC also approved investments of Rs 600 crore (Rs 6 billion) to produce Bharat II & III compliant petrol and diesel.

Then the US-based technology supplier UOP was roped in for modifications in process and absorption of new technologies which has resulted in production of mix xylene feed which is likely to improve margins.

Another Rs 75 crore (Rs 750 million) will be invested in setting up a marketing and distribution network. It will make the refinery independent of PSU company's infrastructure preparing for the de-regulated market effective April 2004.

It has also initiated talks with Essar Oil to supply products for the latter's foray into retail. Essar is currently importing products.

Till MRPL's marketing and distribution channels are in place, ONGC is negotiating with HPCL and BPCL to perk up their product requirement.

The ministry of petroleum & natural gas is actively considering a proposal from MRPL to increase absorption of petrol, diesel and kerosene in the domestic market, in line with its heightened production. Negotiations with HPCL and BPCL are at an advance stage for signing a contract.

Even the stock markets are gung-ho. From Rs 7 in March, the MRPL scrip closed Friday at Rs 37.95.

From the looks of it, it appears that MRPL is finally living the course it was destined for.

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