Mangalore Refinery And Petrochemicals Ltd Management Discussions

1. Economic Overview

The global economy was resilient despite Russia-Ukraine con ict and the consequent challenges in energy and food security caused by the war, and the unprecedented tightening of global monetary conditions to combat in ation. In 2023, in ation receded in most major economies, recession was mostly avoided, supply chain disruption eased considerably. Although the global economy has slowed, the outlook is somewhat more benign than anticipated. But new problems have emerged over the past year. The Russia-Ukraine con ict continues, there is a new crisiswhich has emerged in the Middle East, whiletensions between the worlds two largest economies remain signi cant, and patterns of trade and cross-border investment are shifting. The con ict affected one of the major trade routes in the world, Red Sea which is of relevance to India.

There are divergences among economies across regions impacted by combination of Russia-Ukraine con ict, cyclical effects like monetary and scal policies and extreme weather events. Multilateral co-operation can ensure all countries achieve better growth. All countries should aim to limit geo-economic fragmentation that prevents joint progress toward common goals and instead work towards restoring trust in rules-based multilateral frameworks that enhance transparency and policy certainty and help foster a shared global prosperity.

India is now one of the worlds fastest-growing economies. Private investment and government spending supported growth. The GDP growth for the year 2023-24 was 7.6 %making India the fastest growing large economy in the world. The country saw a rebound in the industrial sector and corporate pro ts pointed to resilient performance. Industries ramped up production to meet demand. Credit growth and increase in air travel indicated buoyancy in the services sector. The control over scal de cit gave the government room to focus on infrastructure spending and to support jobs and income. Higher government spending on building infrastructure and improving logistics helped reduce the cost of doing business and encouraged further private investment. In the year ahead, these should underpin GDP growth. There are in ationary risks associated with high food and high crude oil prices. These risks are being well addressed by the government through supply side interventions. Indias growth trajectory is favoured by manufacturing opportunities, increased digital adoption and cost competitiveness for exports. Besides the sizeable domestic market provides scale for competitive advantage. While demographics do favour Indias growth the government is also focused on improving productivity through skill development for economic ef ciency.

The Indian governments Vikasit Bharat initiative, marking the centenary of independence, is a strategic blueprint for national development. It pivots on four cardinal pillars: Yuva, Garib, Mahila, and Kisan, aiming to foster an inclusive, sustainable, and progressive socio-economic environment. The Interim Budget 2024 underscores this commitment, allocating a substantial Rs.75,000 crore for state reforms, catalyzing alignment with the developmental vision. The Viksit Bharat @2047: Voice of Youth campaign and the Ideas Portal are instrumental in galvanizing youth engagement and public participation, respectively, ensuring a collective stride towards a prosperous, developed India by 2047.

Role of Oil PSUs in Vikasit Bharat Vision:

The role of Oil Public Sector Undertakings (PSUs) in the governments vision for a Developed India, is signi cant.Oil PSUs are envisaged to align their strategies with the national goals set under the Vikasit Bharat initiative, focusing on economic growth, infrastructure enhancement, and sustainable development. Their roles primarily on the following objectives are outlined: s Ensuring Energy Security: As India aims to become a $30-trillion economy, the demand for energy will signi cantly increase. Oil PSUs will be vital in ensuring a steady supply of oil and gas to meet the countrys

energy needs.

s Supporting Infrastructure Development: Oil PSUs contribute to enabling infrastructuredevelopment including transportation and communication networks by providing the necessary energy resources for infrastructure

projects.

s Promoting Sustainable Practices: With a focus on sustainable development goals, Oil PSUs have announced their plans to invest in cleaner and more ef cient technologies to reduce the environmental impact of energy

production.

s Boosting Economic Growth: The oil and gas sector is a major contributor to the Indian economy. By increasing production and re ning capacities, Oil PSUs can support economic growth and generate employment.

s Enhancing Research and Innovation: By strategic investments being planned in research and development to nd innovative solutions for energy challenges, Oil PSUs contributesigni cantly towards technology and

innovation in the country.

2. Overview of Energy Industry

The world remains reliant on fossil fuels for energy needs despite renewables. While renewable energy expanded, fossil fuels (coal, oil and gas) maintained an 82% share of total primary energy consumption. The pressures since the global energy crisis of 2022 have eased but oil markets are volatile. Continued Russia-Ukraine con ict is now accompanied by the Middle East crisis which also bears the risk of being protracted.The outlook for oil demand varies across regions of the world. The decline in oil demand in advanced economies is expected to be pronounced in the current decade. Chinas oil demand growth is expected to weaken while in emerging markets and developing economies, which see growing populations and car ownership, oil demand is predicted to grow continuously to 2050.

The global share of fossil fuels in primary energy mix is projected to drop to 70% by 2030 driven by energy transition. Simply cutting investments in Oil and Gas will not take the world to a Net Zero scenario. It is important to continue investments in Oil and Gas to avoid a precipitous drop in availability during energy transition. Growing global momentum could accelerate the energy transition, nevertheless multiple assessments suggest that conventional fossil fuels will remain part of the energy mix till 2050 with regional differences. Fossil fuels will be the bridge to a just and orderly transition to clean energy.

India is projected to be the fastest growing major developing country over the next two decades. The government is pragmatically diversifying its energy supply sources without jeopardizing with a "Net Zero at all costs" approach. The country is also seizing its unique opportunity to decarbonize while energy demand increases driven by economic growth. The unique solution oriented approach of Govt. to the Energy Trilemma Energy Security, Sustainability, and Affordability ensures that the countries long term development objectives are kept on focus.

New Oil and Gas blocks are being offered for exploration with nancial incentives and marketing freedom. There have been discoveries at some and production has commenced at few of these locations. Natural Gas infrastructure across the country is being expanded for greater share in cleaner energy. The government is aware that energy transition is nuanced and any thoughtless pushback on Oil and Gas can be chaotic. India is enhancing its re ning capacity from 5 mb/d to 6 mb/d by 2030 to meet demand. The capacities in alternate energies are being rightly decided based on national circumstance. The country has achieved 10% Ethanol Blending in Motor Spirit. It aims to realize 20% blending by 2025. The government has announced target for blending Bio-Fuel in ATF. With the Green Hydrogen Mission, the hydrogen ecosystem is being developed intended as a solution to some climate challenges. Incentives are being offered for Green Hydrogen from equipment manufacture to production while demand is being aggregated though target sectors. The government is encouraging resilience in clean energy through domestic manufacturing, technology innovation and policy interventions.

3. Oil Market

The oil markets in 2023 were relatively resilient. The fears of oil disruption at the start of Russia-Ukraine con ict reduced with Asian Markets having absorbed the majority of Russian Oil. The shift in global oil supply from key producers in the Middle East to the United States and other Atlantic Basin countries is also impacting global oil trade. The continued rise in output from these regions has prevented other key producers from maintaining elevated prices and has spread market share. At the beginning of 2024, rising geopolitical tensions in the Middle East, which accounts for one-third of the worlds seaborne oil trade, has markets on edge. There is risk of global supply disruptions due to the Middle East con ict particularly for oil and gas ows through the Suez Canal where in 2023 roughly 10% of the worlds sea borne oil trade(crude and oil products) and 8% of global LNG trade occurred.Barring this, the market is projected to be reasonably well supplied in 2024.

In the case of India, rising domestic demand is driving re neries into adding capacities and by 2030 1MMb/d of additional distillation capacity will be added. This would be more than any other country other than China. The government is strengthening the diversi cation of crude supplies for security and is also working on bolstering its Strategic Petroleum Reserves for resilience in the event of disruption.

4. Performance of MRPL

MRPL achieved a Crude Throughput of 16.53 MMT during the year that translates to a Capacity Utilization of 110% in a year which also saw the turnaround activities of its phase-3 units. The Distillate Yield and Fuel and Loss were 78.77% and 11.02% respectively. The investment by MRPL in the desalination plant once again enabled the company to tide over water crisis during monsoon. MRPL enhanced its product portfolio by commencing production of Mineral Turpentine Oil. The income and pro ts that the company generated has bene ted in deleveraging. The company has initiated studies for petrochemical increment where it plans to invest capital over the medium term. MRPL achieved the highest ever sales of 153980 KL across Retail Outlets in the year. Thirty Eight (38) new Retail Outlets were commissioned during the year taking the total no. of operational outlets to one hundred one (101) as on 31st Mar 2024.The Marketing Terminal Infrastructure Project at Devangonthi near Bengaluru is nearing commissioning. The railway siding facility for petcoke has been providing safe and environment friendly mode of evacuation on a consistent basis. Record 181 rakes were handled in the year. MRPL has been maintaining leadership position in its region of operations for polypropylene sales. Further its Pan India presence is catering to a diverse market.

5. Crude Basket

Your company meets its crude oil requirement from various National Oil Companies of exporting countries on term basis and from open market on spot basis. During 2023-24, the company procured 16.76 MMT of crude oil of which 12.35MMT was imported and 4.41MMT was sourced domestically. New crudes Siberian Light (Russia, API-35.1), KGD6 (India, API-45.5) and KGD 98/2 (India, API- 33.77) were processed during the year.

6. Products

The production details are given below:

Major Reasons for Signi cant Change in Ratio (i.e. 25% or more from previous year):

1. Interest Service Coverage Ratio (ISCR): Mainly due to increase in EBIDT A during the current nancial year along with reduction in nance cost.

2. Debt Equity Ratio: Mainly due to reduction in overall borrowings on account of pro t during the current nancial year.

3. Operating Pro t Margin : Mainly due to increase in Operating Pro t on account of lower Exchange Rate Variation loss during current nancial year as compared to previous nancial year.

4. Net Pro t Margin : Mainly due to increase in Net Pro t after Tax on account of lower Exchange Rate Variation loss during current nancial year as compared to previous nancial year.

8. Opportunities and Threats

Regional imbalances would be seen across the world in demand growth of oil for fuels. India is expected to see

continued demand in the next two decades. The pace of industrialization would contribute to this growth in

Gasoil, Aviation Fuel and Motor Spirit. Despite the increase in electric vehicles and ef ciency improvement programs, demand is projected to translate to an increase in re ning capacity by 1 mb/day by 2030. Without these gains the re ning capacity demand would be higher up to 1.5 mb/day. The petrochemical consumption in India, being well below world average, is increasing with urbanization and emergence of a wealthier middle class. MRPLs re ning capacity and its complexity is boosting light and middle distillate production through processing of sour and heavy crudes. MRPL is revisiting its business model, asset base and technology options. It is aimed at asset utilization with option to integrate into chemicals, renewable fuels and other emerging areas. MRPL aims petrochemical growth over the medium term. Green Fuels are gaining momentum. These drop-in fuels serve to decarbonize transportation. MRPL is planning to incorporate Bio-ATF and 2G Ethanol technologies in the near term.

More than 50% of the products manufactured by MRPL are transportation fuels. Although India is predicted to be amongst the last of the big economies to wean away from oil, there are sign-posts for re neries for future readiness. Asset integration, proximity to markets, product diversi cation and energy costs are key. Energy costs are interlinked with crude costs. MRPL is undertaking a signi cant augmentation of its grid power infrastructure that would allow it to decouple from crude costs and lower its energy costs. MRPLs plans have to be symmetric with commercial opportunities. The petrochemical growth rate in India is projected to be 1.4 times the GDP growth rate. MRPL would align accordingly. Bio-Fuels and Green Hydrogen technologies are maturing and capital allocation has to be weighed. The company would be staging its investments in these areas.

9. Strengths and Weaknesses

The presence of three different crude trains as part of the re nery con guration is ensuring versatility in processing different grades of crude from across the globe. This provides exibility and opportunity in crude buys from favourable markets round the year. The superior technologies that MRPL has invested in deliver products at lower costs. MRPL also has the design to procure secondary feedstock to produce high value products. With petrochemicals, income is diversi ed and MRPL is gaining from an expanding market. The re nery design is well suited to repurpose for ole nic or aromatic pathways for the future. The present gap between oil demand and low carbon alternatives is enabling MRPL to craft its strategy for income diversi cation without risking nancial stability. Initiatives in operational ef ciency and reduction of emissions are directly related and MRPL operations are aimed at these pivotal metrics. The re nery is advantaged with certain speci c units which require minimal or limited changes to hydrotreating or separation sections for feed co-processing for Bio-Fuelsmanufacture. Green Hydrogen is intended to replace Grey Hydrogen used in re nery processes. This would have collateral bene t of freeing naphtha for use as a petrochemical feedstock.

MRPL has been largely dependent on the Oil Marketing Companies in the past and it is strategizing to reduce that dependency. The company is expanding its Retail Footprint. This would take it through a growing and competitive domestic market. MRPL faces changing market conditions driven by climate challenges and environmental regulations. The global trend may be to move away from fossil fuels in transportation but petrochemicals would still require fossil feedstock for decades. The design of the re nery has exibility to integrate higher petrochemical production when fuel demand tapers in the future. The success of the Alternate Fuels business depends on site location, vicinity to feedstock and know-how to deliver max value with minimum technical solution. The company is assessing its Alternate Fuels portfolio along these lines. The long term strategies comprising Petrochemicals, Bio Fuels, Alternate Energy and Net Zero Actions are complex requiring signi cant capital through external nancing to navigate energy transition.

The global supply of crude is getting heavier and more sour except in United States. Unstable production from North Africa along with diminishing production from the North Sea is also affecting this mix. These changes are causing volatility and re neries have to adjust their feed stocks more frequently than before. MRPL has three robustly designed crude trains providing agilityto respond to market dynamics. The overall quality of its assets, including investments in conversion units,is providing this dexterity. The crude slate is selected based on product slate optimization. Business Process Optimization is ensured through excellence in supplies and operations planning. The linear programming model is updated to re ect changing availability, quality and price deltas of various crude oils. This has been valuable for MRPL to tap into opportunity crudes quickly. MRPL is also designed to procure secondary feedstock when available at economic value. The supply chain is well managed. The SPM facility supports crude procurement in large quantities for freight advantage. Typically, the SPM is shutdown during monsoon due to weather vagaries. It is worth mentioning here that SPM operations during monsoon are being evaluated by MRPL based on best practices in industry. MRPL is bene ted by its presence on the West Coast of India. It has a short haul advantage from key crude producing region. This permits optimum inventory holding without the risk of re nery going dry. The company has an optimum mix of term and spot crude purchases as part of its feed stock sourcing strategy.

MRPL has been improving margins through high utilization rates, access to low cost feedstock and investments in lowering energy costs. Operations and Maintenance are being supported by predictive AI tools for reliability and optimization. Maintenance turnarounds of multiple units have been aligned to avoid fragmented downtime. This has spread xed costs over higher plant runs. Capital is being invested to deliver highest value at least cost. The project to augment Grid Power use is underway and will boost margins through energy ef ciency on completion. At a deeper level, the company is focused on carbon molecule management, optimization in hydrogen use, minimization of utilities and reduction in emissions.

Revenue expansion is being achieved economically through capacity creep. Revamp of an existing business

unit provides the shortest path for value creation. MRPL has undertaken the study to debottleneck the PFCC

Unit. This is envisaged to manufacture large quantities of high value monomers used in petrochemical manufacture. The revamp program would be complemented by new units for produce niche petrochemicals. . MRPL aims to be a key player in domestic fuel sales. With 1000 Retail Outlets planned over the medium term to achieve 1 million tons in sales, the marketing outreach would translate to creation of an important pro t centre. In the fast expanding Polypropylene market, the pan India presence is de-risking through market penetration.

Your Company has a well-established internal control mechanism which ensures effective internal control environment. Your Company is constantly improving and upgrading its system of internal control towards ensuring management effectiveness and ef ciency, reliable reporting on operations and nances and securing high level legal compliance and risk management. Adequate systems of internal control commensurate with the Companys size and nature of its operations are in place. These have been designed to provide reasonable assurance with regard to recording and providing reliable nancial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses, executing transactions with proper authorization and ensuring compliance of corporate policies.

The Internal Audit is supervised by the Audit Committee which continuously monitors the effectiveness of the internal control systems with an objective to provide to the Board of Directors, an independent, objective and reasonable assurance on the adequacy and effectiveness of the organizations risk management control and governance process. The Audit Committee reviews adequacy and effectiveness of the Companys internal control environment and monitors the implementation of audit recommendations and follow up actions.

Your company is also covered by regular compliance and performance audits by the Comptroller and Auditor General of India. CAG has deputed a Resident auditor to the company. The company is also under the jurisdictional oversight of the Central Vigilance Commission and has a full- edged Vigilance Department headed by a Chief Vigilance Of cer.

The Company has Joint Venture viz. Shell MRPL Aviation Fuel Services Limited (SMAFSL) with Shell B.V. Netherlands wherein your Company holds 50% of share capital and the balance is held by Shell Gas BV, The Netherlands. The accounts of SMAFSL have been consolidated with MRPLs Accounts.

SMAFSL supplies aviation turbine fuel (ATF) to both domestic and international airlines at several Indian airports and acts as a contracting Company for Indian carriers International Aviation Fuel requirements. The total income for FY 2023-24 is Rs 2121.16 Crores as against Rs 1633.39 Crores in FY 2022-23 with Pre-tax pro t of Rs 40.90 Crores (Previous Year Rs 100.93 Crores) and post-tax pro t of Rs 30.80 Crores (Previous Year Rs 75.22 Crores).

During2017-18, the Company reduced its share holding in Mangalam Retail Services Limited (MRSL) to 18.98% and accordingly MRSL presently is not an associate Company of MRPL. MRSL has not yet started commercial operations.

The physical performance of your company in FY 23-24 was excellent. The capital investments in infrastructure, revamp, ef ciency improvements and reliability are delivering the intended objectives. The company is well placed in key metrics of Capacity Utilization and Leverage. The company is focused additionally on product margins through operational ef ciency and marketing expansion. MRPL has surpassed commissioning of 100 Retail Outlets covering Karnataka and Kerala. These will be further expanded and new outlets will be rolled out in adjoining states. MRPL has grown organically over the years. Inorganic pathways will also be evaluated. New capital will be invested in sustainable fuels, green hydrogen and petrochemicals. The company aims to be integrated and a leader in its operating region.

All statements that address expectations or projections about the future, but not limited to the Companys strategy for growth, product development, market position, expenditures and nancial results, are forward-looking statements. Since these are based on certain assumptions and expectations of future events, the Company cannot guarantee that these are accurate or will be realised. The Companys actual results, performance or achievements could thus differ from those projected in any forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any such statements on the basis of subsequent developments, information or events. The Company disclaims any obligation to update these forward-looking statements, except as may be required by law.