nagarjuna oil refinery ltd Management discussions

Global Economic Scenario

The Global economy has registered a growth rate of 3.7 percent in the year 2017, the highest growth rate since 2011, and growth is expected to remain steady during 2018 supported by strong momentum, favorable market sentiment and accommodative financial conditions. Growth in emerging markets and developing economies as a whole is projected to strengthen to 4.5 percent in 2018.

Indian Economic Scenario

India has emerged as the fastest growing major economy in the world and it is expected to be one of the top three economic powers of the world over the next 10-15 years, backed by its strong democracy and partnerships. Indias GDP is estimated to have increased 6.7 per cent in 2017-18 and is expected to grow 7.3 per cent in 2018-19.

India is also focusing on renewable sources to generate energy. It is planning to achieve 40 per cent of its energy from non-fossil sources by 2030 which is currently 30 per cent and also have plans to increase its renewable energy capacity from 57 GW to 175 GW by 2022.

Oil and Gas Sector International Perspective

The oil and gas industry will continue its slow recovery as upstream companies increase production, helping the midstream and services businesses as well, according to Moodys 2018 outlook.

Organization of the Petroleum Exporting Countries (OPEC) extended its cuts and adhered to them, while U.S. producers increased production and kept costs down. Excess supply will continue to dampen oil prices in the coming year. Natural gas prices, on the other hand, will benefit from higher demand, but price gains will still be limited.

The Sector is stable for the integrated oil and gas business over the next 12-18 months. Earnings will rise about 5% even as conditions remain strained as companies seek greater returns on upstream investments.

The midstream segment is positive as well, with earnings likely to increase 8-10% in 2018. Both upstream capital spending and production will increase. The downstream segment i.e., refining and marketing sector is stable, with earnings likely to increase 5-7% in 2018. Demand for distillates will remain strong, helping to ease high inventory levels, and Middle Eastern fuels will gradually displace European products.

Indian Perspective

Indias Oil and Gas sector is set to pick up pace in 2018 on the back of rising crude oil prices, strong fuel demand, increase in domestic oil and gas production and favourable Gross Refinery Margin (GRM) outlook for the refiners.

These factors are likely to be supported by reform initiatives meant to secure investment in the sector. Auction for oil and gas acreages, creation of a behemoth through merger of existing oil PSUs, setting up the countrys first gas trading and exchange platform and the possibility that natural gas will be brought under GST.

The three Oil Marketing Companies signed a Joint Venture agreement to construct the worlds largest refinery-cum petrochemical complex with a capacity of 60 Million Tonner Per Annum at the cost of $40 billion.

The Government of India has adopted several policies to fulfil the increasing demand. The government has allowed 100 per cent Foreign Direct Investment (FDI) in many segments of the sector, including natural gas, petroleum products, and refineries, among others

Companys strengths and opportunities

Your company has controlling interest in Nagarjuna Oil Corporation Limited (NOCL) which is setting up a 6 MMTPA refinery project at Cuddalore, Tamilnadu 180 km south of Chennai on the Bay of Bengal. The state-of-the-art project will refine 6 million metric tonnes of crude petroleum per year (MMTPA) in Phase-I, which will primarily meet the growing energy needs of southern India. It is the single largest private sector investment in Tamil Nadu and declared as anchor unit for the proposed Petroleum Chemical & Petrochemical Investment Region (PCPIR) in Tamil Nadu. The project includes infrastructure facilities that provide scope for further expansion of refining capacity by an additional 9 MMTPA in phase II.

Threats and concerns

The implementation of oil refinery project was impacted by cyclone ‘Thane. The physical completion of the Project as on date is 58%. The company perceives non-receipt of further funds from various stakeholders as a major concern and a threat to the existence of the Project which in turn will impact the companys investment.

National Company Law Tribunal (NCLT), Chennai Bench had admitted the applications of the corporate creditors of NOCL and initiated the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC, 2016). NCLT had appointed an Insolvency Resolution Professional (RP) for NOCL The RP of NOCL has invited Expression of Interest from prospective Resolution Applicants for the purposes of submission of Resolution Plan in accordance with provisions of IBC, 2016, to NCLT and the process is on.

Outlook / Future plans

The future for refinery sector is conducive for investment with favourable government policy and a stable business environment.

Internal control and Risk management

Your company has adequate internal control systems in place commensurate with the size of the company. Your company has a structured internal audit and risk management framework which encompasses the entire operations of the company The company has a web based legal compliance management system to monitor compliance of the various laws applicable to the company.

Financial performance

The Loss after tax for the year was Rs. 14,297.20 Lakhs against loss after tax of Rs. 23,988.87 Lakhs for the previous year. The main contributors to the loss was on exceptional item representing a provision of Rs.14,0000 lakhs towards diminution in the value of investment in Nagarjuna Oil Corporation Limited (NOCL) in addition to Rs. 23,622.00 Lakhs and Rs.40,000 Lakhs provided in the year 2016-17 and 2014-15 respectively. National Company Law Tribunal (NCLT), Chennai Bench, has initiated the Corporate Insolvency Resolution Process (CIRP) initiated against NOCL under the Insolvency and Bankruptcy Code, 2016. Considering the developments, the management as a prudent measure, made an additional provision of Rs.14,000.00 Lakhs during the Current Financial Year ended March 31, 2018.

Human Resources / Industrial Relations:

Your company has significant cooperation from its Associates in the business operations and has harmonious industrial relations.