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Margin continue to disappoint; expect a revival going forward

* MRPL reported a miss on EBITDA due to lower than estimate refining margin and higher opex during 3QFY21.

* Refining throughput saw a gradual improvement during 3QFY21 (came in better than our estimate), implying a utilization of ~82%.

* During the recent commissioning of the Kochi-Mangalore pipeline, MD Mr. M Venkatesh said the refinery is ready to consume ~0.5mmscmd of gas immediately from the pipeline. Modification of the gas turbine is underway (completion by FY21-end), post which consumption should reach ~1mmscmd. Usage of gas would aid profitability in the current subdued refining margin environment.

* We believe refining margins would revive from current levels as demand normalizes for petroleum products across the globe (as COVID lockdowns are phased out completely) and due to closure of refinery complexes (estimated ~3mnbopd over the next 2-3 years).

* Dependence on the Nethravathi River until the desalination plant comes on stream in CY21 would continue to impact performance. Reiterate Neutral.

EBITDA came in lower than our estimate…

* EBITDA was a miss at INR0.9b (v/s our estimate of -55%, -66% YoY), led by higher opex. Refining opex stood at USD4/bbl (v/s USD2.6 in 3QFY20).

* Forex gain was higher than our estimate at USD0.5b. Higher depreciation was offset by lower interest income.

* MRPL recognized DTA of INR0.34b during 3QFY21 (amounting to INR2.9b for 9MFY21). PAT loss stood at INR0.7b (v/s our estimated loss of INR1.2b and INR0.4b in 3QFY20).

* For 9MFY21, EBITDA/PAT loss stood at INR2.2b/INR5.5b (v/s a loss of INR4.4b/INR11.1b in 9MFY20).

…due to lower than estimated refining margin and higher opex

* Refining throughput came in 6% higher than our estimate at 3.1mmt (-25% YoY) as product demand improved gradually over 3QFY21.

* Reported GRM stood at USD3.3/bbl (v/s our estimate of USD3.5/bbl).

* The company reported inventory gain of USD2.8/bbl, resulting in core GRM of USD0.4/bbl (v/s USD2.7 in 3QFY20).

* For 9MFY21, refining throughput stands at 7.5mmt (-28% YoY), with core GRM at USD0.2/bbl (v/s USD1 in 9MFY20).

Valuation and view

* MRPL’s refinery complex has been facing major challenges in terms of fresh water shortage from the Nethravathi River. The company is setting up a seawater desalination plant, which is likely to be completed by 2Q-3QFY22.

* The stock trades at 5x FY23E EPS of INR7.2 and 4.3x FY23E EV/EBITDA.

* We value the stock at an EV of 5x FY23E EBITDA to arrive at a fair value of INR44/share for the standalone refinery and deduct INR7/share for OMPL. Our target price stands at INR38 per share. Maintain Neutral.