MANAGEMENT DISCUSSION AND ANALYSIS REPORT

1.0 ECONOMY OVERVIEW

1.1 World economy

The world economy is now more interconnected than ever. Financial markets are heavily regulated while capital markets are expanding in Asia, Africa and Latin America. Europe seems to be back in the game, with Germany leading the recovery of the continent. The US is still the world's most competitive economy, according to the IMD World Competitiveness Ranking. The process of deleveraging the balance sheets of governments and companies is under way. Interest rates and government bond yields are at historical lows and stock markets have recovered to br-crisis levels.

Oil prices in U.S. dollars have declined by about 55 percent since September, 2014. The decline is partly due to unexpected demand weakness in some major economies, in particular, emerging market economies also reflected in declines in industrial metal prices. But the much larger decline in oil prices suggests an important contribution of oil supply factors, including the decision of the Organization of the Petroleum Exporting Countries (OPEC) to maintain current production levels despite the steady rise in production from non-OPEC producers, especially the United States. Oil future prices point to a partial recovery in oil prices in coming years, consistent with the expected negative impact of lower oil prices on investment and future capacity growth in the oil sector.

The recovery in the United States was stronger than expected, while economic performance in all other major economies most notably Japan fell short of expectations. The weaker than expected growth in these economies is largely seen as reflecting ongoing, protracted adjustment to diminished expectations regarding medium-term growth prospects. During the year the U.S. dollar has apbrciated the Euro and the Yen have debrciated and many emerging market currencies have weakened, particularly those of commodity exporters. The interest rates and risk sbrads have risen in many emerging market economies, notably commodity exporters, and risk sbrads on high-yield bonds and other products exposed to energy prices have also widened.

The decline in oil prices driven by supply factors are expected to reverse only gradually and partially will boost global growth over the next two years or so by lifting purchasing power and private demand in oil importers. The impact is forecasted to be stronger in advanced economy oil importers, where the pass-through to end-user prices is expected to be higher than in emerging market and developing oil importers. However, the boost from lower oil prices is expected to be more than offset by an adjustment to lower medium-term growth in most major economies other than the United States.

NALYSIS REPORT

Investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence, the forecast assumes less of a policy response to the underlying moderation. Slower growth in China will also have important regional effects, which partly explains the downward revisions to growth in much of emerging Asia.

Oil exporters, for which oil receipts typically contribute to a sizable share of fiscal revenues, are experiencing larger shocks in proportion to their economies. Those that have accumulated substantial funds from past higher prices and have fiscal space can let fiscal deficits increase and draw on these funds to allow for a more gradual adjustment of public spending to the lower prices.

1.2 Indian economy

In India, the growth forecast is broadly unchanged, however, as weaker external demand is offset by the boost to the terms of trade from lower oil prices and a pickup in industrial and investment activity after policy reforms.

As per the latest GDP growth estimates, Indian economy grew by 7.3% in FY15 compared to 6.9% in FY14, mostly driven by improved economic fundamentals and revision of GDP methodology calculation. Even inflation showed signs of moderation therefore reduced inflation, falling crude oil prices, improved purchasing power and consumer spending, higher capital inflow supported by the government policy reforms have already put India on an accelerating growth track and improved the business outlook.

The Government envisages GDP growth upto 8% in FY16 driven by strengthening macroeconomic fundamentals and implementation of policy reforms recently announced will be critical growth enablers to de-bottleneck stalled projects, improve the investment outlook and the ease of doing business in the country. Reforms currently underway such as GST implementation, Amendment on Land Acquisition Bill, Labour Reforms, etc. are expected to provide the requisite thrust for growth in the medium-term.

The petroleum product demand in India would continue to grow in near future. India is one of the fastest growing economies in the world. Since economic growth and demand for energy and oil are positively correlated, the high economic growth in near and medium term would increase the demand for petroleum products. The demand for petroleum products in the country is growing at a rate of around 3% p.a. Despite the increasing petro products demand, India's per capita consumption of oil is 0.8 barrels per year which is very low vis-a-vis the world average of approximately 4.5 barrels of oil per year. There is a large section of Indian population which does not have access to petro products. The high economic growth will increase the per capita consumption of petro products in India.

2.0 INDUSTRY OVERVIEW

2.1 Global Scenario

Global primary energy consumption has increased over last years. Oil continues to enjoy its br-eminent position as the largest constituent of the primary energy consumption basket.

USA was the largest consumer of total global oil consumption. However, emerging countries like India & China have shown an enormous appetite for oil in recent times commensurate with their economic growth over the past decade.

According to the International Energy Outlook of US Government, the global consumption of liquid fuels is expected to increase to 110.6 mb/d by 2035. China and India are expected to be the major demand centres in the near future with Indian imports expected to increase up to 550 kb/d by 2015 while China's crude oil imports are also expected to be ramped up by another 400 kb/d. Further, with increased focus on pollution curbing mechanisms the demand for middle and lighter distillates which are EURO IV and above compliant is expected to increase.

Renewable fuel sources are increasingly in demand for environmental concerns, depleting reserves and the desire for reduced reliance on Middle Eastern oil become ever more brssing concerns. Despite renewable energy's attractive environmental and political attributes, expectation of the share of the proportion of energy that will be derived from renewable sources in developed economies over the next 20 years is limited and would not be able to meet incremental demand.

The Middle East and North African regions (MENA) have significant oil reserves and are expected to continue their dominance in global oil production in the near future. The rising crude oil supply requirement in near future would be met mainly by OPEC nations. OPEC which accounts for about 40% of Global oil output.

Crude oil demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. The Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily, as it has $900 billion in reserves. The turmoil in Iraq and Libya two big oil producers with nearly 4m barrels a day combined has not affected their output and the market is more concerned about geopolitical risk. Finally, America has become the world's largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.

The oil market was funded in a major way in the last few years by cheap dollars flowing out of the Federal Reserve's quantitative easing programme, with interest rates at near zero, surplus funds flowed into the commodity markets, notably crude oil, driving their prices upwards. With the Fed winding up its stimulus programme and an interest rate hike in the U.S. possibly just round the corner, funds are now flowing out of commodities, driving their prices down. It is not a coincidence that oil prices started falling at around the same time that the Fed first indicated the possibility of a rate hike in the near term.

Oil prices are likely to stay soft for at least the rest of this year though periodic minor spikes cannot be ruled out. This is, as said at the beginning of this piece, good news for the world economy and also India's. Cheaper fuel prices will put more money in the hands of consumers which will, in turn, be either invested or spent elsewhere.

2.2 Indian Scenario

The crude oil refining companies in India can be categorized as pure refiners like MRPL, CPCL, NRL, etc. and integrated refining and marketing companies like IOCL, HPCL, and BPCL and private sector companies such as Reliance and Essar. India is becoming a refining hub with huge potential to cater to its rising local and regional demand. Presently, there are total of 22 refineries in the country comprising 17 refineries in the public sector and 5 in the private sector and JV sector with Refinery capacity of 215 MMTPA (approx).

Further, the refinery sector which was dominated by the PSU refiners in the mid-1990s is witnessing gradual shift towards private refiners with setting up of refineries by Reliance and Essar.

During the next few years, additional refinery capacity of 89.6 MMTPA is expected, thereby increasing the total capacity to 304.66 MMTPA.

The petroleum product demand in India has increased from 100 MMTPA in 2001-02 to 158 MMTPA in 2013-14. The high economic growth in India has resulted in a strong demand for refinery products. The main growth driver has been the transportation sector which has witnessed a major boom over the past few years. The product wise breakdown of demand for past 5 years as under:

Indian demand for petroleum products is growing rapidly. In 2014, Indian petroleum product demand was approximately 158 MMTPA. Demand is expected to grow at up to 4% per year in the next 2 years i.e. in 2016 demand is forecasted to approach 170 MMTPA.

HSD accounts for around 43% of the overall sales in the domestic market while MS accounts for around 11% share. During the period, MS registered a growth of 6% CAGR whereas the demand for HSD has grown by around 4%. As India's economic growth gathers more momentum in the coming years, the demand for high value refining products like LPG, MS, and HSD would grow at faster pace than other petroleum products.

The consumption of petroleum products in the financial year 2014-15 has increased by 6,726 TMT compared to financial year 2013-14 while the Production has increased by 444 TMT in financial year 2014-15 compared to financial year 2013-14.

Export of Petro Products

India is rapidly emerging as a global refining hub due to the following enabling factors:

• Refining capacity in US and Europe is almost stagnant or on decline due to stringent environmental norms which has increased their reliance on imports from developing markets

• Indian refiners have competitive advantage on account of lower capital and operational costs

• Proactive government policies are boosting investment in Indian refining sector

• New Indian coastal refineries have high complexity which helps them to make products like Euro IV and Euro V which meets the emission standards of the developed markets and thus helping them earn better margins

India is a net exporter of petroleum products with gross exports of 67.9 MMTPA and net exports of 51.1 MMTPA in FY 2013-14. During the past 6 years, the net exports from India have increased from 15.96 MMTPA in 2006-07 to 51.15 MMTPA in 2013-14. The major export markets of India include USA, Western Europe, China and Japan which are net importers of petroleum products.

Exports of petroleum products during 2014-15

With production exceeding consumption, India continues to be an exporter of petroleum products. Indian Refiners are investing in upgrading the product quality to International standards and convert low value products to high value products.

The high complexity of the new refineries being set up and up-gradation of existing refineries enable them to process heavy and sour crudes into lighter and middle distillates which help them realize better refining margins. Further, the demand for superior quality fuels has been growing due to stringent vehicle emission norms. Older and smaller refineries in the West cannot upgrade to high quality fuels as it is not economically feasible for them. In view of this, new refineries coming up in India with state of art technologies and appropriate product slate will have opportunities to tap export markets in the future.

Crude Imports by India:

The crude oil import in the country over the years has been on increasing trend in line refining capacity growth. India has imported about 192 Million Tonne crude oil during the year (2014-15) in comparison to 189 Million Tonne during 2013-14.

Crude oil import in 2013-14 was $165 billion, about 36 per cent of the total import bill. In April-November 2014, it was $90.3 billion, about 28.3 per cent of the total import. India also exports petroleum products and in FY14-15 till November, these were $42.6 billion or fifth of total export.

International crude oil prices have fallen rapidly during the year. Brent and Dubai Crude oil price averaged to $85 per barrel and $83 per barrel during 2014-15, a sharp decline of 20 % from brvious year prices of $108 and $105 per barrel. During the year, Crude Price fell to lowest in last six year, This decline (on annual average basis) is the sharpest decline in more than a decade. The declining trend got aggravated during last few months when Brent Crude Price fell to around $ 45 per barrel, the lowest in last six years.

Your Company sources its crude oil requirement from various National Oil Companies of crude oil exporting countries on term basis and from open market on spot basis. During 2014-15, MRPL procured 14.24 million tonnes of crude oil out of which 13.02 million tone was imported and balance was sourced from indigenous sources like Bombay High & Ravva from ONGC/ (Iran) Cairn India. Import of crude oil was from various source including National Oil Company like Saudi Aramco (2.8 mmt), ADNOC (1.75 mmt), Kuwait Petroleum Corporation (2 mmt) and Sonangol EP (0.50 mmt). To meet the LSHS requirement / shortfall in crude requirement MRPL also imported crude oil (0.80 mmt) through spot Tender during the year.

During 2014-15, your Company has processed various opportunity crude, which has to expand its crude basket during 2015-16 as well. To explore the new sources of crude oil and look for optimize, Your Company is in discussion with prospective / new term crude oil suppliers from countries / sources like Colombia, Mexico, Venezuela, etc for supply of crude oil in addition to enhancement of volumes from current suppliers. With the commissioning of Phase-III, the Company has started processing heavier crude oil(s).

Crude Oil Import from Iran:

Ongoing Iran issues related crude oil import from Iran, News report have reported some progress in the negotiations between (permanent members of UN Security Council + Germany) with Iran to resolve the issue. The sanctions relief includes Iran's crude oil sales, enabling Iran's current customers to purchase their current average amounts of crude oil and repatriate agreed amount of revenue held abroad.

As the Joint Combrhensive Plan of Action has only provided limited sanctions relief relating to certain activities only, many of the problems and issues faced by MRPL in the aftermath of the Iran sanctions still continue like non availability of vessels to perform Iranian voyages, lack of marine insurance for transportation of Iranian cargoes, insertion of exclusion clause by insurance companies in Mega Risk insurance policy of MRPL refinery etc. In view of the same, brsently, crude oil import from Iran is being carried out on CIF basis

3.0 OPPORTUNITIES & THREAT :

Lower oil prices also offer an opportunity to reform energy subsidies and taxes for both oil exporters and importers. An oil importers, the saving from the removal of general energy subsidies should be used toward more targeted transfers, to lower budget deficits where relevant, and to increase public infrastructure if conditions are right.

Sizable uncertainty about the oil price path in the future and the underlying drivers of the price decline has added a new risk dimension to the global growth outlook. On the upside, the boost to global demand from lower oil prices could be greater than is currently factored into the projections, especially in advanced economies. But oil prices could also have overshot on the downside and could rebound earlier or more than expected if the supply response to lower prices is stronger than forecast. Important other downside risks remain. In global financial markets, risks related to shifts in markets and bouts of volatility are still elevated. Potential triggers could be surprises in activity in major economies or surprises in the path of monetary policy normalization in the United States in the context of a continued uneven global expansion. Emerging market economies are particularly exposed, as they could face a reversal in capital flows. With the sharp fall in oil prices, these risks have risen in oil exporters, where external and balance sheet vulnerabilities have increased, while oil importers have gained buffers. In the euro area, inflation has declined further, and adverse shocks domestic or external could lead to persistently lower inflation or price declines, as monetary policy remains slow to respond. In many major economies, there are still some downside risks to prospective potential output, which would feed into near-term demand. Geopolitical risks are expected to remain high, although related risks of global oil market disruptions have been downgraded in view of ample net flow supply

Oil refinery business is US Dollar (USD) dominated. The prices for both the crude oil and products are based on international quotes, exchange fluctuation in Rupee vs Dollar rate are automatically factored and provides a natural hedge against exchange rate volatility in normal course. However, sudden and high fluctuation may causes impact. Any fluctuation in the international crude prices gets captured in the sale price to a large extent so long as the prices of the products follow the same pattern as that of fluctuation in crude oil prices.

Your Company imports as well exports, which provides a natural hedge against exchange fluctuation. Efforts are made to match the exposure in USD to the extent possible, thereby mitigating to a large extent. Volatility in crude and product prices impacting refining margins. Your Company imports around 80% of its requirement of crude oil and exporting approximately 47% of the total production, where sale proceeds are realized in USD. Even in case of domestic sales the sale prices are based on trade/ import parity prices in International market which provides a natural hedge to a large extent. Your Company exports its major products like HSD, ATF and MX on average of the monthly prices, which reduces the risk of intra month price fluctuations. However sudden fluctuations in crude and product prices will have significant effect on the margins of your Company.

4.0 RISKS & CONCERNS :

Your Company operates in a business environment that is characterized by increasing globalization, intensifying competition and more complex technologies, which have their own sets of risks and concerns impacting the business. We, at MRPL have identified the following risks inherent to its business and also outline how these risks are mitigated.

• Crude supply risk:

Refineries are susceptible to the risk of timely supply of crude oil for smooth production to avoid shortage of crude which may result into reduction in throughput. Because of the nature of its operations Crude supply risk may be caused due to any stressed geo-political situation with the supplier nations, non-availability of suitable vessels and reduction of crude supply by Organization of the Petroleum Exporting Countries (OPEC).

Your Company has been continuously diversifying the sources of procurement of crude by adding additional countries as well as grades of crude. Your Company initially had only term contract with NIOC (National Iranian Oil Company of Iran) but brsently term contracts for procurement of crude with various suppliers like SAUDI ARAMCO (National Oil Company of Kingdom of Saudi Arabia), ADNOC (National Oil Company of Government of Abu Dhabi), KPCL (Kuwait Petroleum Corporation) and Sonangol (National Oil Company of Angola). Your Company is proposing to increase imports through term contract with additional suppliers. Your Company has also supply agreement with ONGC Group for procurement of crude from its various oil fields like Bombay High, Ravva, Nile Blend, and Sakhalin on arm's length basis. Your Company has also plans to procure approximately 15-20% crude in International spot markets for taking advantage of flexible pricing through spot tender.

• Price risk

This risk relates to the fluctuation of crude oil prices and refined petroleum product prices in the international market. With oil's stature as a high-demand global commodity comes the possibility that major fluctuations in price can have a significant economic impact. The two primary factors that impact the price of oil are supply & demand and market sentiment. In oil trade, demand refer to consumption pattern of oil by world's major economies and supply means output of crude oil from OPEC (Organisation of Petroleum Countries) & other oil Production. While market sentiment is attributed to geo-political situation like tensions as we have at brsent in the Middle East, Africa and Ukraine.

The Refinery profitability is dependent on the margin between crude oil prices and refined petroleum product prices for profitability. Your Company has adopted a conscious business strategy for procurement of crude oil by keeping proportion of spot/ trial crude oils at optimal levels to have cost effective crude purchase in the projected market scenario.

To mitigate price risks, your Company enters into long-term contracts as well as open international markets to source crude oil at competitive prices. Management brpare the rolling plan three months ahead to identify any changes in the profile of price risk and takes appropriate action on a timely basis. Other approaches to drive down costs include an increase in the use of cheaper tough crudes and use of blending to improve the product slate. The volatility to the Foreign Exchange hedging is not resorted in the Company.

• Foreign exchange risk

This risk relates to the impact of foreign exchange fluctuations because of the Company's exposure to foreign currency imports/exports as part of its normal operations.

Foreign exchange fluctuations are managed in accordance with the guidelines and limitations defined in the "Risk Management Policy" approved by the Board of Directors. Your Company has already constituted a Risk Management Committee to look into the risk overview of your Company periodically reviews the exchange fluctuations.

Your Company has engaged the consultant to advise on the Foreign Exchange fluctuation risk and measures for mitigating the same. However, looking into the higher hedge cost as compared to the volatility in the Foreign Exchange market. Hedge is not resorted by the Company.

• Refinery margin risk

Operating efficiency and access to crude oil of the required quantity, quality and price has a significant impact on the Company's performance. While refined product normally tracks changes in feedstock prices, there is a lag which can impact short-term working capital requirements and profitability.

Increased production efficiency through technological advances and reliable operation is another ongoing mitigating factor. Business Process Optimization meetings are held internally to analyse the trends and way forward for the following months to optimize the margins.

• Marine insurance cover risk

Marine Insurance cover for import of Iranian crude is brsently arranged through the National Iranian Oil Company (NIOC). Your Company is in the process of having alternative arrangement for sourcing crude in case the US and European Union sanctions are fully made operational and sourcing of crude from Iran becomes difficult. However, your Company has taken a combrhensive mega risk insurance cover for its assets to safeguard them from these unforeseen risks as well as loss of profit due to business interruptions which of course carries exclusion of Sanctions clause.

• Reputational risk

This risk relates to the potential commercial and reputational damage that could result from a health, safety or environmental incident or conflicts with local communities, terrorism, or the geo-political location of refinery. The Company is at risk given the nature of its operations.

The Company has a Health, Safety and Environmental (HSE) policy and other HSE Management Systems (HSEMS) in place. These are communicated to employees and training is provided on a regular basis. Necessary tools are in place to monitor emissions in plants/ refineries and medical expertise and support is available at all locations. Regular reviews are carried out to ensure compliance with HSE policy/ HSEMS and adherence to regulatory requirements. The Company engages and works closely with local communities to maintain relationships and to ensure that concerns are heard and acted upon in a timely manner.

• Other unforeseen Natural risk

Your Company is also concerned on various negative factors like shortage of water, depleted water reservoirs due to poor monsoon and other natural calamities which could impact the operation of the refinery.

However, your Company has formulated a well-defined policy framework including implementation procedure and monitoring mechanism for the risk management system. Risk Managers are evaluating the identified risks on monthly basis and also identifying new risks with the mitigation measures and reporting directly to the Chief Risk Manager, Director (Refinery). The enterprise risk management overview document is placed before the Audit Committee and Board on quarterly basis.

5.0 STRATEGIC BUSINESS PURSUITS & FUTURE OUTLOOK

Your Company have signed an MoU with Government of Karnataka for setting up a Linear Alkyl Benzene (LAB) Plant (for producing raw materials to manufacture detergent) and to expand its Refining capacity to 18/21 MMTPA subject to techno economic viability and availability of required infrastructure at Mangalore with an approximate investment of Rs. 8,500 Cr.

You are aware that your Company has implemented mega expansion and Upgradation project with huge capital investment. The facilities coming up will not only provide opportunities to your Company to process wide range of crudes but also source them at a cheaper cost. The new units will increase the distillate yield of the refinery to around 80% and also produce value added products viz Propylene. The Propylene produced will be converted to Polypropylene in its Polypropylene unit. Your Company being the only company in south India to produce Polypropylene, it will be able to channelise this product in the South market. Petcoke another product which is growing at the rate of 8.63 %, CAGR will find an easy way in this demand driven market. The product quality of entire MS and HSD will be upgraded to Euro standards in line with the directions of Government of India thereby which will meet countries demand and also get a good price in the international markets. The evacuation of Petcoke in the domestic market is the challenge for your company and non evacuation could impact the continuous operation of DCU (Delayed Coker Unit).

6.0 INTERNAL CONTROL SYSTEMS:

Your Company has a well established internal control review mechanism which assures effective internal control environment to the Audit committee and Board of Directors.

Your Company is constantly improving and upgrading its system of internal control, towards ensuring management effectiveness and efficiency, reliable reporting on operations and finances and to secure high-level legal compliance and risk management. Your Company has in place adequate systems of internal control commensurate with its size and the nature of its operations. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorised use or losses, executing transactions with proper authorization and ensuring compliance of corporate policies.

The Internal Audit Department is supervised by the Audit Committee and it continuously monitors the effectiveness of the internal control with an objective to provide to the Board of Directors, an independent, objective and reasonable assurance on the adequacy and effectiveness of the organization's risk management, control and governance processes. The Internal Audit Department assesses opportunities for improvement in business processes, systems and controls; provides recommendations designed to add value to the organization and follows up on the implementation of corrective actions and improvements in business processes after review by the Audit Committee and the Senior Management.

7.0 PERFORMANCE:

During the financial year 2014-15 your Company has achieved new heights of performance both on physical and financial parameters and surpassed its past performance by setting up a new bench mark.

Your Company has processed crude of 14.65 MMT during the year against 14.55 MMT during the brvious year, and posted the turnover of Rs. 62,412 Crores as against Rs. 75,226 Crores in the brvious year and Export Turnover of Rs. 22,790 Crores against Rs. 35,392 Crores during the brvious year. The turnover is however lower due to lower price in the International market.

8.0 HUMAN RESOURCES :

During the year 2014-15, your Company continued to enjoy cordial and harmonious relations with the collectives and as evidence to the same not a single man-hour was lost on account of any industrial disturbance.

Total employee strength as on 31/03/2015 was 1720 including 125 women employees, 202 SC/ST employees and 7 Physically Challenged employees. 742 employees belong to Management cadre whereas, 978 employees belong to Non-Management cadre.

9.0 CAUTIONARY STATEMENT :

Statements in the Management Discussion and Analysis Report and Board's Report describing the Company's objectives, projections and estimates, are forward-looking statements and progressive within the meaning of applicable laws and regulations. Actual results may vary from those exbrssed or implied, depending upon economic conditions, Government Policies and other incidental factors. Readers are cautioned not to place undue reliance on the forward looking statements.