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Weak GRM, utilization dent 1Q performance

* MRPL delivered a substantial miss vs. our estimates in 1QFY25 due to a weak refining performance, with GRM/throughput coming in 32%/7% below our estimates. As a result, EBITDA came in 56% below our estimate. In Jul’24, Singapore GRM (SG GRM) has been only marginally up at USD4/bbl vs. USD3.5/bbl in 1QFY25 and as such, we have trimmed our 2QFY25 earnings estimates, leading to a 32% cut in our FY25E PAT numbers.

* We build in GRM of USD6.9/USD8.4 per bbl in FY25/FY26, leading to RoE of 11.9%/17.2%. Further, we model a throughput of 17mmt in FY25/FY26, in line with company guidance.

* We believe strong FCF generation of INR26.9b/INR36.6b in FY25/26 and a reduction in debt will result in a declining the net debt-to-equity ratio to 0.5x by the end of FY26 (vs. 0.89x currently). MRPL earlier guided for INR80b of capex over the next five years toward:

* increasing petchem integration from 10.0% to 12.5%

* increasing total retail outlets to 1,000 by FY27 (from 100 currently)

* launching Isobutyl-benzene, with a pilot plant already awarded

* We are bullish on refining from a medium- to long-term perspective, given only 3.3mb/d of net capacity additions globally in the 2023-30 period. However at 2.2x FY26E P/B (FY26E RoE: 17.2%) we believe valuations for MRPL remain elevated and re-iterate our Sell rating, implying 21% potential downside from the CMP.

Lower GRM and throughput lead to a miss

* The refining throughput was below our est. at 4.4mmt (flat YoY) in 1QFY25.

* Reported GRM was USD4.7/bbl (vs. our est. of USD6.9/bbl).

* Resultant EBITDA stood at INR6.2b (vs. our est. of INR14.1b). PAT came in at INR656m (vs. our est. of INR5.6b).

* Other highlights:

* MRPL achieved the highest-ever monthly crude processing of 1,593tmt in May’24.

* ’Varandey’ crude from Russia and ‘Eocene’ crude from Saudi-Kuwait were processed for the first time in Jun’24. ‘Kaliningrad’ crude from Russia was processed for the first time in Apr’24.

* As of Jun’24, the debt-to-equity ratio improved to 0.89x (vs. 0.94x as of Mar’24).

Valuation and view

* The stock is currently trading at FY26E EV/EBITDA of 7.1x. Additionally, the dividend yield is expected to be a meager 0.9%/1.4% in FY25/FY26 at the current price. Our GRM assumptions of USD6.1/bbl for 2QFY25 and USD8.4/bbl from 3QFY24 onward are also at the higher end of what the company has delivered historically.

* We value the stock at 6x FY26E EBITDA of INR64.4b to arrive at our TP of INR170. We reiterate our SELL rating.

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