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Disappointing performance continues

* MRPL reported a substantial miss vs. our estimates in 2QFY25 due to a weak refining performance, with GRM coming in at USD0.5/bbl (our estimate: USD5/bbl). The weakness in 2QFY25 financial performance was likely a result of weaker core GRM as well as inventory loss coming in higher than our estimate (USD2.5/bbl).

* Following the weak 2QFY25 result, we cut our FY25 EBITDA by 50% as we temper our GRM assumption to USD4.5/bbl (earlier: USD6.6/bbl). We also reduce our FY26 EBITDA by 24% and revised our GRM assumption to USD6.9/bbl (earlier: USD8.4/bbl). Further, we model a throughput of 17mmt for FY25/FY26. In 1HFY25 company has reported a net loss of INR 6.1bn while in 2HFY25 we are building in moderate improvement in refining GRM (due to seasonally stronger winter months) leading to 2HFY25 PAT of INR 10bn.

* Following this downward earnings revision, our revised TP stands at INR131, premised on 6x Dec’26E EV/EBITDA. In Oct’24TD, Singapore GRM (SG GRM) has been 24% lower than 2Q, averaging at USD2.7/bbl and oil demand growth is likely to remain weak in CY25 at ~1mb/d. As such, we do not foresee a sharp turnaround in the refining cycle in the near to medium term.

* We believe a strong FCF generation of INR22.3b/INR29.1b in FY25/26 and a reduction in debt will result in a decline in the net debt-to-equity ratio to 0.6x by the end of FY26 (vs. 0.89x currently).

MRPL earlier guided INR80b of capex over the next five years towards:

* increasing petchem integration from 10.0% to 12.5%,

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

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

* However, at 1.9x FY26E P/B (FY26E RoE: 12.2%), we believe valuations for MRPL remain elevated. We reiterate our Sell rating, implying a 21% potential downside from the CMP. Weak core GRM; inventory loss leads to earnings miss

* The refining throughput was in line with our est. at 4.6mmt (up 43% YoY) in 2QFY25.

* However, reported GRM came in at USD0.55/bbl (vs. our est. of USD5/bbl). The sharp variance vs. our estimate was likely due to weaker core GRM as well as inventory loss. We were building in inventory loss of ~USD 2.5/bbl.

* The GRM was a sharp deterioration over 1QFY25 (reported GRM: USD 4.7/bbl) despite Singapore GRM remaining stable on a q-q basis.

* 2QFY25 profitability was also impacted by forex loss of INR 0.4bn.

* Resultant EBITDA stood at negative INR4.3b (vs. our est. of positive INR8.3b). Net loss came in at INR6.8 (vs. our est. PAT of INR1.8b).

* Other highlights:

* The Devangonthi marketing terminal was commissioned in Aug’24, and HSD tanker loading has also commenced via this terminal.

Valuation and view

* The stock is currently trading at FY26E EV/EBITDA of 7.9x. Additionally, the dividend yield is expected to be a meager 0.3%/1.2% in FY25/FY26 at the current price. Our GRM assumptions of USD6.4/bbl for 2HFY25 are also at the higher end of what the company has delivered historically.

* We value the stock at 6x Dec’26E EBITDA of INR51.4b to arrive at our TP of INR131. We reiterate our Sell rating.

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