As part of the first phase of deregulation prices of petroleum products have been decontrolled. Further, refinery profitability is now governed by the difference between tariff adjusted import parity price for controlled products coupled with market determined prices for decontrolled products and the landed cost of crude oil. The administered pricemechanism (APM) which assured a 12 per cent post-tax return has been done away with. This is causing havoc for the refineries as international product prices are near their decades low. Realisation on these products have come down substantially as against the time when they were enjoying assured returns.

MRPL being a sole refiner with no right to market its product and one of the newest plants in the sector as compared to other players in the industry, is more adversely affected.

On the flip side the company has an advantage, that the deregulation policy has allowed private and joint sector companies to source their requirements of crude oil. To this extent the company will benefit as it will be in a position to import the kind of crude which is best suited for its plant. Though, MRPL is not allowed to hedge in the international market to prevent it from currency as well as price fluctuations, there is nothing to stop them from meeting its requirement from a trader who would do it on their behalf.

Apartfrom this, there is little scope of improvement in its profitability in the current fiscal. Even if crude prices increase the company's margins will not change much as product price will move in line. In spite of this there is equity dilution waiting round the corner.

Though already discounted for, the situation will worsen due to equity dilution to the tune of Rs 726 crore as a result of conversion of debentures in December, 1998. The conversion being a book-entry will not result in any cash flow except for a saving of Rs 50.82 crore on interest outgo. However, it will be more than compensated by redemption of 16 per cent and 17.5 per cent debentures and loan repayment resulting in cash outflow of Rs 186.43 crore. Not that the company ever had a comfortable financial position. Against the required debenture redemption reserve (DRR) of Rs 485.2 crore as on March, 1998, the company has created DRR of only Rs 110.33 crore due to non-availability of profit. Unless, the profit jumps drastically, dividend is fewyears away.

The method of accounting for retention margins is not most prudent either. Based on estimated costs, Oil Co-ordination Committee has provisionally approved 70 per cent of costs and margins for 1997-98. Actual costs of the company being higher than estimated, the retention margins have been accounted for at 100 per cent of the approved provisional margins. The provisional retention margins for 1996-97 has been revised downwards by the OCC. The company has not accepted the revised margins and hence not provided for resulting in profit for the year being overstated by Rs 131.46 crore.

For income earned during the construction period, the income tax liability provided for and being disputed by the company is Rs 148.19 crore. There is little possibility of the write back in accounts as the issue has been decisively settled by the Supreme Court. In Tuticorin Alkali Chemicals Vs. CIT 227 ITR 172(SC), it was held that interest earned during construction period is taxable under `income from othersources.'

Non-payment of dues from the oil pool account has had its affect on the company, what little attraction was left in the scrip has been taken away by partial deregulation of the sector. Expansion of the plant will do little to the company's profitability. What the company needs is rights to market its products, which could help its margins considerably.