Burning Midnight Oil

MRPL, a 3-million tonne standalone refinery is an unlikely candidate for a portfolio column. Especially when the country is in midst of a huge deficit in its oil pool account. And MRPL is a victim of this crisis since the government owes it nearly Rs 500 crore as payment due under the complex administered pricing mechanism (APM). But, what makes MRPL still investment-worthy, at least in the short-term is an expected spike in its earnings in the current fiscal. Of course, much depends on the market sentiment. Even otherwise, MRPL is an exception among existing refineries and that makes it somewhat exciting.

Technically, MRPL's refinery is superior to the existing refineries in the country. It is the first refinery to have a continuous catalytic reformer (CCR), making 100 per cent unleaded gasoline and the sulphur content in its HSD is the lowest at 0.25 per cent. On the other hand, existing PSUs will be spending a few thousand crore for various refinery modernisation projects (including diesel hydro-desulphurisation and CCR projects) in the next three years.

HPCL's hydro-desulphurisation project is expected to cost over Rs 1,300 crore. MRPL's 3-million tonne refinery alone cost Rs 2,792 crore. And the expanded capacity (another 6 million tonnes) is coming at a cost of Rs 3690 crore. MRPL's also has its own all-weather jetty and a captive power plant (existing 45 MW and 67.5 MW for the new project). Marketing of the output is taken care of by HPCL which is also its co-promoter.

Among private refineries, it has a head start. The refineries to be put up by Essar and Reliance groups will come only beyond 1999/2000 while MRPL's expanded capacity will be operational in August 1999. Also keep is mind that its first refinery was commissioned three months ahead of schedule, in end-March 1996. The head start over other refineries would not have mattered in a free market scenario. But, with the APM still in force, the early start benefits MRPL.

To quote Jardine Fleming, under the existing system, since return is offered on capital employed which falls as the asset depreciates, returns are highest in the beginning and progressively decrease as the asset depreciates. As a result, net profits also trend down with time. In free markets the opposite is true: profits will be minimal at first when the depreciation burden is high, but increase later as the interest burden falls away, then spring sharply upwards when the plant is fully depreciated. The chart on