Published on 14/03/2020 11:59:18 AM | Source: Motilal Oswal Services Ltd

Option Strategy MRPL Ltd by Motilal Oswal

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Better than expected core GRM, but concerns remain

* Reported 3QFY20 GRM was higher than expected at USD3.19/bbl (v/s - USD0.63/bbl in 3QFY19). However, MRPL’s GRMs have not always been good on a sustainable basis; at times it has been hit by water woes and at times, by technical issues.

* Also, SG refining margins have been under pressure due to large incremental supply glut amidst tepid global demand.

* Poor refining margins to continue for few more months. Dependence on the Nethravathi River until the desalination plant comes on stream in 2021 would also adversely impact performance; reiterate Neutral.


Better-than-expected GRMs lead to lower losses

* MRPL reported an EBITDA gain of INR2.8b in 3QFY20 (v/s est. INR0.4b and loss of INR4.9b in 3QFY19), as reported GRM stood at USD3.19/bbl v/s loss of -USD0.63/bbl in 3QFY19. Forex gain during the quarter was INR0.2b v/s INR3.8b in 3QFY19. PBT stood at loss of INR0.45b and the company recognized deferred tax assets of INR83m for the quarter (totaling to INR5.7b in 9MFY20). At the PAT level, the company reported a loss of INR0.37b (v/s loss of INR2.6b in 3QFY19).

* For 9MFY20, reported EBITDA stood at a loss of INR4.3b v/s gain of INR12.6b in 9MFY19; PAT loss was INR11.1b v/s INR130m gain in 9MFY20.

* The company is in the process of evaluating the new reduced corporate tax rate (at 25.17%). It has realized deferred tax assets during 9MFY20 at the old tax rate (33.9%).


Throughput improved after two quarters of operational issues

* Crude throughput was down 8% YoY/10% QoQ to 4.1mmt (in line with est.), implying 109% utilization for the quarter.

* Core GRM for 3QFY20 stood at USD2.73/bbl (v/s est. USD1.4/bbl and USD4.0/bbl in 3QFY19). Inventory gain for the quarter was USD0.46/bbl v/s loss of USD4.63/bbl in 3QFY19.


Valuation and View

* Originally, it was expected that the INR150b Phase-III expansion would generate ~USD8/bbl of GRM when SG GRM is at USD6/bbl.

* In 1QFY20, due to fresh water shortage from the Nethravathi River, MRPL was forced to close its refining units for ~75 days (similar issue faced in 2012 and 2016 also). The company is setting up a sea-water desalination plant, which is likely to be completed by 3QFY21 (with capex of ~INR6b). The company is also focusing on increasing the use of domestic sewage.

* The board has approved raising INR30b through issue of Non-Convertible Debentures (NCDs) in 2QFY20.

* The stock trades at 7.6x FY21 EPS of INR5.7 and EV/EBITDA of 5.3x FY21E. We value the stock at an EV of 5x FY21E EBITDA to arrive at a fair value of INR50/share for the standalone refinery and deduct INR4/share for OMPL. Our target price stands at INR46. Maintain Neutral.


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