Refining performance continues to worsen
* Lower-than-expected core GRM and refining throughput, along with higher opex, led to a huge miss on EBITDA during the quarter.
* MRPL’s GRMs are struggling from the last couple of quarters and have not been good on a sustainable basis, at times impacted by water woes and at times by technical issues.
* Various refineries saw a drop in utilization from July as demand for petroleum products fell on the back of extended/further imposition of lockdown. Factoring the same, along with a huge miss in 1QFY21, we build-in refinery throughput at 12.8mmt/16.0mmt (earlier 15.1mmt/16.5mmt) for FY21/FY22. Thus, our revised EPS stands at INR0.3/INR8.3 (from INR4.1/INR8 earlier) for FY21/FY22.
* Dependence on the Netravathi River until the desalination plant comes on stream in 2021 would also adversely impact performance; reiterate Neutral.
Lower throughput; higher opex
* MRPL reported EBITDA loss of INR4.8b in 1QFY21 (v/s est. gains of INR0.3b and loss of INR4.7b in 1QFY20), with higher opex (at USD7.9/bbl).
* Reported GRM stood at loss of USD1.49/bbl (v/s est. gains of USD3/bbl and loss of USD0.42/bbl in 1QFY20). Forex loss during the quarter was INR0.1b, resulting in PBT loss of INR8.0b. The company recognized deferred tax assets of INR2.7b for the quarter (v/s a total of INR12.5b in FY20).
* At the PAT level, the company reported loss of INR5.2b (v/s est. loss of INR2.4b and loss of INR5b in 1QFY20).
Throughput dips due to COVID-19-led lockdown
* Crude throughput was down 28% YoY / 52% QoQ to 1.85mmt (8% below est.), implying 49% utilization for the quarter.
* Core GRM stood at USD0.23/bbl for 1QFY21 (v/s est. gains of USD2/bbl and loss of USD0.1/bbl in 1QFY20). Inventory loss for the quarter was USD1.72/bbl (v/s est. gains of USD1/bbl and loss of USD0.3/bbl in 1QFY20)
Valuation and view
* In FY20, the company’s refinery complex faced major challenges in terms of freshwater shortage from the Netravathi River in 1QFY20. As a result, MRPL was forced to close its refining units for ~75 days (similar issue faced in 2012 and 2016 as well). Although, the company is setting up a seawater desalination plant, likely to be completed by 3QFY21 (with capex of ~INR6b).
* Originally, the INR150b Phase-III expansion was expected to generate better GRMs. However, the current environment for GRMs remains highly tepid, weighed by global demand destruction.
* The stock trades at 4.5x FY22 EPS of INR8.3 and 4.2x FY22 EV/EBITDA.
* We value the stock at EV of 5x FY22E EBITDA to arrive at a fair value of INR48/share for the standalone refinery, and deduct INR8/share for OMPL. Our target price stands at INR40. Maintain Neutral.
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