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Phenomenal GRMs to help reduce debt

ONGC-&-HPCL-promoted Mangalore Refinery and Petrochemicals (MRPL) is India’s largest single-location PSU refinery, a credible play on refining and petchem in South India having 15mtpa capacity, versatile design, complex secondary processing units, high flexibility to process crudes of various APIs. It produces the full range of petroleum products such as naphtha, LPG, motor spirits, high-speed diesel, kerosene, aviation turbine fuel, sulphur, xylene, bitumen along with pet coke and polypropylene.

GRM environment - impressive, supportive of growth: Lower global gasoil stocks and robust demand for petroleum products are expected to sustain, thereby keeping key product cracks higher. The company sources over 35% of its crude requirements from Russia at a discount, thereby boosting GRMs, one of the highest amongst Indian refiners at a single location. The benchmark Singapore GRM and the company’s GRM are trending higher than their last 10-year averages, supported by stronger demand, reduced supply, and lower stocks. We assume FY25 and FY26 GRMs of respectively $8.0 and $7.2/bbl vs the last 7-year average reported GRM of $6.0 and the Singapore GRM of $5.4.

Growth-conducive developments: Between FY12-15, capex of Rs 150bn was undertaken to modernise and expand Phase III. This include a polypropylene plant and a Single-Point Mooring (SPM), which help facilitate the anchoring of very large crude carriers. MRPL faced constant disruptions due to inadequate water supply from Netravathi River. The desalination project involving outlay of ~Rs 6bn was completed in FY22 causing higher refinery utilization. Cost-effective Russian crude fetched better GRMs and lowered working capital requirements.

Petchem Capex: To boost petrochemical production capacity, MRPL has planned a capex of Rs 470bn, with close to Rs 300-400bn allocated towards new production plant in Karnataka, to be operational in next 5 years; while Rs 60-70bn on petrochemical units. For Phase IV expansion, it has begun land acquisition process to acquire close to 850 acres.

Retail presence: Currently, MRPL depends on OMCs for domestic sales. It plans to reduce this dependency by aggressively focusing on retail outlet additions, as also expand retail outlets in southern Indian to over 500 in three years from current level of 71. Later, it will expand into north region and take the total count of outlets over 1,800 in medium term.

OMPL merger: The May’22 merger incurred losses of Rs 72bn, ~ Rs 30bn loss will be fetching tax advantage over next 3-4 years. MRPL took over equity from ONGC and outstanding loans of ~Rs40bn. The aromatics unit manufactures paraxylene and benzene, with paraxylene market currently facing headwinds, production slate was shifted to reformat mode for MS.

RLNG Sourcing: MRPL plans to source R-LNG which produces more hydrogen and offers flexibility in sourcing crude oil. R-LNG would be sourced once it is available at better price compared to furnace oil/naphtha.

Outlook: High GRM sensitivity: a $1/bbl change in GRM changes EBITDA by Rs 9.9bn. BV/share for FY25e/26e: Rs 84/94; debt: equity at 0.7/0.5x FY25e/26e vs 1.7x in FY23. At CMP, stock trades at 6.5x/7.4x FY25e/26e EV/EBITDA & 1.6x/1.4x P/BV. We initiate coverage with ADD rating and TP of Rs151, valuing stock at 1.6x FY26e P/BV.

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

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