IGI Logo

MRPL: Wary of operational flip-flops; downgrade to Sell

Risks outweigh rewards

* MRPL has returned 43% in CY21 on hopes of an improvement in refining margin. However, our research suggests that it continues to suffer from operational challenges, which prevents a consistent performance.

* In FY21, it delivered as premium of USD0.2/bbl over Singapore complex GRM of USD0.5/bbl. However, its GRM also includes benefits from the 0.44mmtpa PP plant, which is capable of contributing USD2-3/bbl as seen from its past financials.

* OMPL continues to battle high debt of ~INR70b. On a consolidated basis, MRPL’s net debt of INR228b is ~2.5x its market capitalization. The company has been contemplating Phase IV expansion, which may further weaken its Balance Sheet. We downgrade the stock to Sell with a TP of INR43.

Baffling underperformance

* The company concluded ~INR150b of Phase-III capex by 1QFY16, with the commissioning of its 0.44mmtpa PP plant. The Phase-III expansion was expected to lend a major boost to GRM, through higher complexity and production of PP.

* Our research suggests that the PP plant is capable of adding USD2-3/bbl to its GRM. Since 1QFY17, when the PP plant was fully stabilized, average premium of its core GRM over SG GRM has been a meagre USD0.5/bbl.

* Core GRM was higher than SG GRM in only nine out of 20 quarters, averaging a premium of USD1.5/bbl.

Frequent shutdowns and water woes worsen performance

* Exhibit 1 shows how not even a single year has gone by since FY12 without any operational challenges. Frequent shutdowns/underutilization have resulted in poor refining margin.

* Lack of adequate water supply from the Nethravathi River resulted in shutdowns in summer. However, MRPL is completing a desalination plant by Oct’21, which could provide it some respite from the summer of CY22.

* Poor PX-naphtha margin have also marred the performance of its subsidiary – ONGC Mangalore Petrochem (OMPL). Weakness in polyester intermediates resulted in PX-naphtha margin slipping to USD143/mt in FY21 v/s USD321/mt in FY16-20. Even at the peak margin of USD436/mt, OMPL reported an EBITDA of only INR9.4b. We estimate an EBITDA of INR13.1b for PBT to break even due to higher interest cost estimated at INR2.4b.

Valuation and view

* Commissioning of the desalination plant may help the company weather the summer from CY22 onwards. The continued miss in value addition from Phase-III expansion over the past few years leads us to believe that the company may not deliver a sustained good performance going forward.

* We forecast a GRM of USD5.5/bbl for MRPL in FY23E. We expect net debt on a standalone basis to decline to INR103b from INR153b due to working capital improvement.

* Valuing the standalone entity at 6x FY23E EBITDA of INR35b, we arrive at a valuation of INR56/share. We value OMPL at 5x FY23E EBITDA of INR7.7b. OMPL’s net debt is expected to stand at INR61b in FY22E. Deducting a value of INR13/share for OMPL, we arrive at a total valuation of INR43/share for MRPL. We downgrade the stock to Sell. A rise of USD1/bbl in GRM may add INR8.6b to its EBITDA and INR33/share to its valuation.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

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