MRPL & RPL - Analyzing Risk and Returns

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Case Details:

Case Code : FINC027
Case Length : 12 Pages
Period : 1993 - 2004
Pub. Date : 2004
Teaching Note :Not Available
Organization : Mangalore Refinery and Petrochemicals Limited (MRPL) and Reliance Petroleum Limited (RPL)
Industry : Petroleum and Finance
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Four Indian oil companies feature among the top ten oil companies in Asia. Reliance Petroleum's market capitalization of Rs 288.24 billion is the highest among Asian refining companies."

- Goldman Sachs Database on Asian Refineries in 2000.

Introduction

Mangalore Refinery and Petrochemicals Limited (MRPL) and Reliance Petroleum Limited (RPL) were the first two refineries established by the private sector in India.

In March 1992, MRPL brought out a public issue of shares, and in September 1993, RPL did the same. Both these refineries were established at a time when the administered pricing mechanism (APM)¹ was in force. APM involved full government control over the oil and natural gas sector, where only four major government owned oil companies (IOC, HPCL, BPCL and IBP) had the right to directly market petroleum products (Refer Exhibit I). The government refineries were not able to meet the increasing demand for petroleum products. Hence, opening up of the oil and natural gas sector to private companies and dismantling APM were considered as methods for reducing the demand-supply gap of petroleum products.

When the Government of India (GOI) approved private sector participation in the oil refining and petroleum industry, a new investment opportunity was made available to Indian investors.

Those who invested in MRPL and RPL were optimistic about the returns on shares of both these companies since reputed leading business houses such as the Aditya Birla Group (ABG)² and the Reliance Group³ promoted these refinery projects. Due to the dearth of oil company stocks promoted by the private sector, the shares of both these companies were lapped up by public investors and financial institutions. Both the public issues were heavily oversubscribed. However, few investment analysts expressed their reservations about investing in stand-alone refineries like MRPL and RPL since they felt that the financial performance of companies in the refining industry was completely dependant on the crude oil prices.

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1] The government-controlled APM for petroleum products is based on the retention price concept, under which oil marketing companies are compensated for operating costs and assured a return of 12% after tax on net worth. This concept ensures a fixed level of profitability for oil marketing companies, subject to their achieving specified capacity utilization. APM ensures that products such as kerosene (used by the economically weaker sections of the population), and diesel (used by public transport and agricultural sector) are protected from the volatility in international oil prices.

2] The Aditya Birla Group is one of India's largest business houses. The group includes companies such as Grasim, Hindalco, India Rayon and Indo Gulf.

3] The Reliance Group was among the largest business houses in India, with interests in several businesses including textiles, petrochemicals, petroleum products, oil & gas, power, telecom, synthetic fibers, fibre intermediates, financial services, refining & marketing and insurance.