MRL's provisional annual results could create a fresh interest in refinery stocks which have been shunned on fears regarding their poor performance. As the results show, the markets appear to have been over pessimistic regarding the financial health of refinery companies. Despite having one of the lowest crude throughputs (94.6 per cent upto January compared to 119 per cent for Gujarat Refinery) the company has posted a topline growth of 42 per cent and a bottomline growth of 17 per cent.

According to the press release issued by the company, the crude throughput from the Manali refinery in 1998-99 was lower at 6.10 million tonnes compared to the previous year's 6.96 million tonnes. This was largely due to the maintenance turnaround in both refineries one and two and once this was over the company's performance improved. If we break the year's results into four quarters we would find that the fourth quarter was the most impressive. Turnover rose by 22 per cent over the thirdquarter and the bottomline at Rs 34.63 crore was the highest of all quarters. This augurs well for the company's performance in the current fiscal.

The spetacular rise in earnings of the company is linked to the change in the mechanism of computing earnings for refining companies. With the freeing of five products from the administered price mechanism (APM), realisations for the refining companies increased as the domestic prices are now linked to international prices. Prior to this arrangement, the prices of refined products were calculated in a manner so as to generate a 12 per cent return on assets. With the depreciation of assets, realisations fell and this led to lower earnings. Although the exact differential is not known, one can estimate that even under the current economic downtrend in commodity prices, MRL realised a higher turnover despite lower volumes. The decline in oil prices saw the raw material cost for Indian companies fall by an identical amount. This would imply an increase in the netrefining margin but ironically, in dollar terms, this has remained unchanged at $O.76 per barrel. However, in rupee terms, the net refining margin in the fiscal 1999 is at Rs 33.68 per barrel up from Rs 26.77 per barrel last year. The 18 per cent rupee depreciation accounts for this difference.

In the current fiscal, MRL should post higher sales because of the rise in throughput. However, the growth in earnings at least for the next two years will be impacted by the ongoing 3 million tonne capacity addition. Also, with production cuts announced by several oil producing nations, crude prices could rise therefore adversely impacting the bottomline.

BHEL

Adjusted for the one time interest income of Rs 82 crore on I-T refund in 1997-98, BHEL's pre-tax profit has remained flat in 1998-99. The net profit is, however, 2 per cent higher. On last quarter to last quarter basis, the performance in 1998-99 appears to be poor at first glance. The net profit in the last quarter of fiscal 1999 is lower by 8 percent compared to the corresponding period of the previous year . However, considering that 1998-99 was an extremely difficult year for the capital goods sector, BHEL has posted excellent results. During the year, BHEL bagged orders worth Rs 5,814 crore (Rs 5,853 crore in 1997-98) which included export orders worth Rs 250 crore (Rs 91 crore). The order book position has remained flat at Rs 10,000 crore. The power division booked orders worth Rs 3,260 crore (Rs 2,685 crore) including NTPC's OECF funded 2*500 mw Simhadri project. This is the single largest and the first turnkey order that BHEL has received for a 1,000 mw power plant. The flip side is that though the order book position looks very impressive mainly due to this order, because of the percentage completion of contract method, at least in the next 18 months, no benefits will be reflected in the books. The project size is Rs 3,500 crore and BHEL's share is Rs 2,000 crore. Among the orders from IPPs, by far the largest is from the Grasim-Powergenpromoted Bina project (2*289 mw) for which BHEL has the EPC contract for the boiler package. The trouble is that though the project is shortlisted for escrow, the cover will be delayed by another six months. In the industry sector, orders worth Rs 2,304 crore were booked (Rs 3,077 crore) but this was only to be expected.

1999-2000 is expected to be another year of single digit growth. But this fact has already been discounted. If the proposal to treat deemed exports at par with physical export goes through, BHEL will be a major beneficiary due to the NTPC order which being awarded through international competitive bidding route, will qualify as a deemed export. Total exports in 1998-99 at Rs 2,061 crore (Rs 1,784 crore) registered a growth of 15.6 per cent. In an extremely unfavourable scenario, BHEL's performance is excellent. The current year, however, will see a negative growth. The effective tax rate for BHEL is 39.5 per cent and as tax is part of costs, any increase is bad news. The 10 per centsurcharge on corporate tax will hurt BHEL badly in FY 99-2000.

Emcee (With contributions from Manish Saxena and Urmik Chhaya)