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Abysmal margins and operational performance continue

* MRPL reported lower-than-estimated EBITDA. Refining throughput was down 24% QoQ (~82% utilization rate) on account of slower demand (impacted by the second COVID wave).

* As per our discussion with the management, the utilization rate at the refinery and polypropylene unit continues to hover at 82–85% currently. Continued concerns over utilization rates would keep margins under pressure (due to higher opex), impacting profitability.

* In its board meeting today, the company announced the following resolutions:

* Raising funds of up to INR50b through the issue of Non-Convertible Debentures

* Increasing the borrowing limit from INR250b to INR335b

* This comes after an increase in consol. debt by ~35% YoY to INR227.5b (standalone debt up by 49% YoY to INR153.6b) in FY21 amid the acquisition of a 100% stake in OMPL. We expect net debt on a standalone basis to decline to INR97b by FY24 (from INR153b in FY21) on WC improvement.

* SG GRM is averaging higher MoM at USD2.9/bbl in July (v/s USD2/bbl in 1QFY22) – the highest ever since the COVID outbreak in Feb’20. The recovery is entirely driven by higher demand for gasoline (margins at USD10.1; +USD3 MoM); ATF and gasoil margins remain the same MoM at USD4.3/4.7.

* With the complete phasing out of the COVID lockdowns and closure of refinery complexes (estimated ~3mnbopd over the next 2–3 years), the refining margin would return to its long-term average (of USD5–6/bbl).

* We forecast GRM of USD5.5/bbl for MRPL in FY23E and FY24E. Although, the continued miss in value additions from the Phase-III expansion over the past few years leads us to believe the company may not deliver a sustained good performance going forward. We maintain Sell on the stock.

Core GRM at –USD0.2/bbl; reported GRM at USD4.5/bbl

* Refining throughput was in-line at 3.06mmt (+65% YoY; -24% QoQ).

* Reported GRM stood at USD4.5/bbl (v/s our est. of USD4/bbl).

* Inventory gains stood at USD4.7/bbl, resulting in core GRM of –USD0.23/bbl.

* EBITDA stood at INR3.7b (v/s -15% on our estimates and INR8.5b in 4QFY21). PAT came in at –INR0.9b (v/s INR3.3b in 4QFY21).

Valuation and view – reiterate Sell

* The commissioning of the desalination plant may help the company weather the summer from CY22. The refinery is likely to consume ~1mmscmd of gas from the Kochi-Mangalore pipeline as the gas turbine modification is now complete. The use of gas would also aid profitability in the current subdued refining margin environment.

* The stock trades at 6.1x FY23 EPS of INR7.5 and 5.3x FY23 EV/EBITDA. Valuing the standalone entity at 6x Sep’23E EBITDA of INR35b, we arrive at a valuation of INR55/share. Deducting value of INR13/share for OMPL, we arrive at a total valuation of INR42/share for MRPL. Reiterate Sell.

* Key risk to our call: An increase of USD1/bbl in GRM may add INR8.9b to its EBITDA and INR30/share to its valuation.

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