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GRM surprised positively

Mangalore Refinery and Petrochemicals (MRPL IN) has corrected 13% in the past three months and underperformed the Nifty Mid Cap index, which fell only 6%, after pricing-in concerns as regards falling transportation fuel cracks (due to weak global demand and rising refining supply). Going forward, in the next 1-2 quarters, expect positive outlook for gross refining margin (GRM) with the onset of Chinese Spring and Ramadan festivals, and travel boost (on Chinese New Year and Maha Kumbh in India). However, beyond H1FY26, expect GRM to be muted due to large refining capacity additions at 1.6mmbpd globally in CY25. We reiterate Reduce.

GRM-driven QoQ earnings growth: PAT was INR 3.1bn in Q3FY25 as against a net loss of INR 7.0bn in Q2FY25 and PAT of 3.1bn in Q3FY24, versus our estimates of INR 2.1bn. EBITDA was INR 10.3bn against an EBITDA loss of INR 4.7bn in Q2FY25 and EBITDA of INR 11.6bn in Q3FY24 (INR 8.7bn estimated). The YoY fall in earnings was on account higher forex loss at INR 1.6bn (up 549% YoY), despite higher GRM at USD 6.2/bbl versus USD 5.0/bbl in Q3FY24 (Elara Estimate: USD 5.2/bbl), a 4% YoY growth in crude throughput and 1% weakening in the INR. QoQ, GRM improved from USD 0.6/bbl.

Middle distillate cracks improved QoQ: GRMs improved QoQ as diesel and jet fuel cracks improved by 11-13% QoQ, while gasoline cracks fell 4%. A sequential improvement in middle distillate cracks was led by lower exports from China, strong holiday season-led demand in APAC and robust growth in demand in India.

Volume of discounted Russian crude jumped but per barrel benefit fell: Per our calculations based on Bloomberg, the contribution of discounted Russian crude spiked to 39% of MRPL’s total crude basket in Q3FY25 from 26% in Q2FY25 and 33% in Q3FY24. However, an 11% YoY drop in Brent crude oil prices resulted in lower discount on Russian crude at USD 5/bbl in Q3FY25 from USD 14/bbl in Q3FY24. So, per our estimates, the positive impact of discounted Russian crude on GRM fell 62% YoY to USD 1.8/bbl.

OPEC analysis indicates bearing environment for refiners in CY25: As per OPEC World Oil Outlook 2024, 1.6mmbpd global refining capacity would be added in CY25, higher than growth in global demand estimated at 1.1mmbpd in CY25, per IEA.

Reiterate Reduce: We reduce FY25E/26E/FY27E EBITDA estimates by 22%/8%/8%, led by lower GRM expectations at USD 5.0-6.4/bbl (from USD 5.5-7.0/bbl). We reiterate Reduce on MRPL, led by expectations of USD 80/bbl crude oil price (that would hit Russian discount) and rising global refining supply from H2FY26. We lower our TP to INR 159 from INR 143, led by weaker long-term GRM expectations at USD 6.4/bbl from USD 7.0/bbl, assuming 6.0x (unchanged) one-year forward FY27E EV/EBITDA.

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