Refined profits

Nagarjuna Oil Refinery (NOR) was formed by the Nagarjuna group (KVK Raju) thru its flagship company Nagarjuna Chemicals & Fertilizers in collaboration with other investors. Recently, NFCL demerged this business and allotted shares in the refinery to its existing shareholders thru a composite scheme of arrangement wherein shareholders of NFCL got shares of NOR as per the terms of the scheme. Now, NFCL holds 51% stake in the project while Tata Petrodyne, a unit of Tata Group, has 30%. Tamil Nadu government holds 5 per cent through TIDCO, Uhde of Germany has 4 per cent and Cuddalore Port has the remaining 10 per cent.

NOR is setting up a refinery over 1,600 acres, located 200-km south of Chennai between Cuddalore and Chidambaram on the east coast. This state-of-the-art project will refine 6 million tonnes of crude petroleum per year (MMTPA) in Phase-I. The refinery will have associated marine infrastructure including single point mooring (for crude oil handling in very large crude carriers) and jetty (for finished product handling). It will have capability of processing heavy and sour crude oil and will supply light and middle distillates.

Some time back, independent oil and commodities trader Trafigura Pte Ltd of Singapore, declared its intention of investing up to Rs 1,250 crore ($250 million) in the Nagarjuna refinery and in storage facilities. This will include buying a 24% stake in the company for Rs 650 crore ($130 million). In addition to acquiring an equity stake, Trafigura will invest a further $120 million into the construction of extensive storage facilities and associated infrastructure at the refinery's 2,500 acre site. This investment was the first of its kind for the company.

This appears to be a case similar to that of MRPL about 10 years back. MRPL was set up in 1988 as a JV between HPCL and Aditya Birla group, with both holding about 38% each and the rest with the public, with an initial processing capacity of 3.0 million tones/annum that was later expanded to the present capacity of 11.82 Million  tones/annum. It was into heavy losses during the late 90s and Aditya Birla group made up its mind to get out. As per the MoU between HPCL and the Aditya Birla group -- the promoters of MRPL -- HPCL had the first right to refuse the Birlas' stake. Once Birlas decided to get out, and HPCL was not too keen on buying their stake, the war for their stake heated up with many renowned bidders such as local major IOC as well as Kuwait Petroleum showing keen interest. Finally in March 2003, ONGC acquired the total shareholding of A.V. Birla Group and further infused equity capital of Rs.600 crores thus making MRPL a majority held subsidiary of ONGC. It also acquired further shares from the public in the following open offer as well as from the lenders who converted their loans into equity as a part of Debt Restructuring package. The current holding of ONGC in MRPL is thus around 71%.  Due to the heavy debt and lack of management attention (due to the tussle between Birlas and HPCL), MRPL stock was languishing close to Rs 8 in 2001. Post OGC coming in and improving not only its operational strength but financial as well, it is around 50 now, down from more than 70 a year or so back, still gaining around 6 times in 11 years, a return of nearly 50% p.a.

So a bad company with a good promoter running it usually has a good chance of turning around. This may well be true of NOR. If Nagarjuna group decides to opt out (as they well be since oil is not their core strength), or for that matter TN govt. as a part of divestment for raising funds since state governments are perennially in need of funds, there could be multiple suitors including international majors for their stake. However, it must be noted that the refinery is yet to be commissioned with the plan being for early 2013, barring unforeseen circumstances. This is a delay of almost six-nine months due to the damage caused by cyclone Thane, which hit Cuddalore last year. Meanwhile, Indian Oil Corporation has signed an agreement with NOR to sell their petroleum products of Nagarjuna Oil. Till then, nothing much may happen, but once it starts going and becomes commercially viable, there will be renewed interest in this.

Since it just got listed some time back, there are no financials to speak of. Also, since the refinery is not commissioned, there is hardly anything to look forward to at this point. But as has been seen in the case of Essar, once the refinery is commissioned, the financials will catch up fast. The Essar Oil grass roots refinery in Gujarat, started in 1996 was completed and commissioned in third quarter of 2006. The refinery project was delayed several times due to environmental concerns and financial problems, including initial cost overruns and a shortfall in equity contributions. According to company reports, the refinery was 60% complete in 1998 but had the misfortune to be struck by a cyclone that caused considerable damage. In 1995, Essar Oil came out with an IPO @45 which plummeted to 15 by Nov ’99 and further sank to 8 by 2000, when there was no sign of the refinery. Since then it rose to about nearly 300 by Dec ’07 when the refinery was going strong. In this year itself, it has again plummeted to about 55 currently. Even considering the worst case, if someone had bought into Essar at 8 in 2000, it would still have multiplied 7 times in 12 years, again a return of nearly 50% p.a.

Since its listing end of March ’12, NOR is currently quoting at the rock bottom price of Rs 6. It may be worthwhile to keep an eye on this one and buy even now as well as when it goes lower with the market and towards the time of its commissioning. There is very little to lose here with the current promoters, irrespective of delays and hurdles which may surely occur in times to come, as has been seen in the cases of Essar as well as MRPL. The only thing to be kept in mind is that this will be a long wait but will in all likelihood be worthwhile.