IGI Logo

Shareholder wealth to improve on stronger GRMs; initiating with a Buy

The 15mtpa Mangalore Refinery and Petrochemicals is a play on refining and petchem in South India, promoted by ONGC and HPC. The high refining-margin context and robust demand would support earnings, creating shareholder wealth with lower debt. The Nelson complexity is ~10.6 but operating efficiency has been impacted on acquiring OMP, given the weak petchem environment. Falling crude prices and discounted crude sourcing have reduced working capital and eased debt. We initiate coverage of the company with a Buy rating, at a TP of Rs66, though we prefer Chennai Petro to Mangalore Refinery.

Strong core refining performance; continues to be impacted by SEAD. MRP’s Q3 FY23 gross refining margin was $3.88/bbl ($4.46 the prior quarter, $9.29 a year ago) while the Arab heavy-light difference was $3.75/bbl. The core GRM was $7.76/bbl ($1.04 the previous quarter, $8.37 a year ago) vs the benchmark $6.3. The GRM was boosted by strong crack spreads for major products: gasoil $39.4/bbl, ATF $33.8, gasoline $5.4. Inventory loss was $3.88/bbl (Rs10.7bn). There was an implication of SAED for products exported at Rs5.29bn ($1.9/bbl) vs Rs10.3bn ($4.34/bbl) in Q2 FY23. Export duty, which has been reduced in the refinery transfer price, per our calculations could amount to Rs15.2bn ($5.49/bbl). This means that the core GRM could be $15.3/bbl. Refinery throughput was 4.48mmt, at ~119% utilisation (105% the prior quarter, 117% a year ago). The $2.1/bbl opex and Rs2.5bn forex loss cut into profitability. Capex was Rs1.45bn; debt was reduced by Rs1.6bn, to Rs180.5bn despite negative Rs350m FCF.

Outlook, Valuation. The GRM sensitivity for the stock is high: a $1/bbl change in the GRM changes the EBITDA by Rs18.5bn and EPS by Rs7.1. We initiate coverage on the company with a Buy rating and a TP of Rs66, valuing the stock at 1x FY25e P/BV.

Risks: Lower GRM environment, change in crude prices and inventory losses, adverse government policy – subsidy-sharing

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at  https://www.rathi.com/LeadGenerate/Static/disclaimer.aspx
SEBI Registration No.: INZ000170832

Above views are of the author and not of the website kindly read disclaimer