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Stock Recommendation | MRPL – BUY – Target Price : 81
Publish date: FEBRUARY 11, 2019
Earnings volatility continues – Negative GRMs
Negative GRMs presumably due to inventory losses, lower other income and exceptional loss resulted in net loss of Rs.2.7 bn in Q3FY19. MRPL reported significantly higher crude throughput of 4.38 mmt, 12% qoq resulting in higher capacity utilization (117%). We believe the margins should improve in the medium to long term with the increase in product prices.
In the medium to long term, the key factors to watch out are GRMs, rupee movement, oil prices and petroleum product demand. Further, investors are waiting for an announcement of swap ratio for merger of MRPL with HPCL.
■ Average realization stood lower at US$ 83/bbl, -6% qoq and -2% yoy due to lower product prices.
■ MRPL reported significantly lower GRMs of (-) US$0.64/bbl in Q3FY19 as against US$4.41/bbl in Q2FY19 and US$9.27/bbl in Q3FY18.
■ MRPL booked Forex gain of Rs.3.85 bn as against a forex loss of Rs.4 bn in Q2FY19 due to currency fluctuations.
We have revised our earnings lower to reflect weak GRMs and inventory losses. Hence, we now expect MRPL to report an EPS of Rs.10/share in FY20E (earlier Rs.10.9). At current price, the stock is trading at 6.5x P/E and 0.9x P/B multiples on FY20E earnings. We maintain BUY on MRPL with a revised price target of Rs.81 (earlier Rs.92), valuing it at 5.5x FY20E EV/EBIDTA. We expect stock to remain in focus on the news flow of merger with HPCL, we opine.
Going ahead, we expect MRPL’s profitability to improve on account of i). Improved product mix, ii). Better refining margins iii). Economies of scale, iv). Forward integration - Polypropylene plant and v). Various tax benefits.
■ Revenue growth: Despite negative GRMs, MRPL’s gross revenue increased 14% qoq to Rs.202.5 bn (+16% yoy) led by higher crude throughput and weak currency. Average realization stood lower at US$ 83/bbl, -6% qoq and -2% yoy due to lower product prices.
■ Crude throughput: MRPL reported significantly higher crude throughput of 4.38 mmt, 12% qoq resulting in higher capacity utilization (116.8%). However, in 9MFY19, the crude throughput increased marginally by 1% to 12.14 mmt.
■ Dismal refining margins: MRPL reported significantly lower GRMs of (-) US$0.64/bbl in Q3FY19 as against US$4.41/bbl in Q2FY19 and US$9.27/bbl in Q3FY18. However, Benchmark Singapore refining margin stood higher at US$5.4/bbl in Q3FY19.
■ Raw material cost including purchases of finished goods: Higher crude oil prices resulted in higher raw material cost for MRPL. RM cost increased 18% qoq to Rs.171 bn (38% yoy) led by higher crude throughput and weak currency. In Q3FY19, MRPL’s average crude oil price increased by 3% qoq to US$ 74/bbl. Raw material cost to sales ratio (%) has increased 750 bps to 89.1%.
■ Employee cost: Staff cost has increased 5% qoq to Rs.1.05 bn (+11% yoy).
■ Other expenses: MRPL’s other expenditure decreased 76% qoq to Rs.0.876 bn. Operating cost per unit has decreased substantially to US$0.83/bbl (-64% qoq) due to higher crude throughput and lower other expenses.
■ Forex gain: MRPL booked Forex gain of Rs.3.85 bn as against a forex loss of Rs.4 bn in Q2FY19 due to currency fluctuations
■ Operating profit: Negative GRMs and higher raw material cost resulted in operating loss of Rs.1.05 bn in Q3FY19 as against operating gain of Rs.1.4 bn in Q2FY19.
■ Interest cost: MRPL's interest cost has decreased to Rs.999 mn, down 15% qoq and 14% yoy.
■ Depreciation: In Q3FY19, depreciation cost decreased 2% qoq to Rs. 1.8 bn (+4% yoy).
■ Other income: MRPL's other income stands at Rs.368 mn in Q3FY19, decreased 4% qoq mainly on account of lower dividend/interest income.
■ Loss/ Profit before tax (L/PBT): MRPL reported a loss of Rs.3.5 bn due to lower operating profit and lower other income.
■ Extra ordinary Expenses: MRPL has reported a forex loss of Rs.103 mn in Q3FY19.
■ The exceptional item for 9MFY19 includes –
a) Expense of Rs.305.3 mn is on account of estimated cost of purchase of Renewable Energy Certificate (REC) from Indian Energy Exchange (IEX), as per the direction received from Karnataka Electricity Regulatory Commission, for meeting Renewable Energy Purchase Obligation (RPO) from the financial year 2015-16 to 2017-18 based on company's captive consumption.
b) Expense of Rs.228.7 mn is towards contribution to "MRPL Defined Contribution Pension Scheme" for management staff (pertaining to the period January 2007 to March 2018) and non-management staff (pertaining to the period April 2007 to March 2018).
c) Income of Rs. 420.5 mn relating to reclaim of input tax credit under Goods and Service Tax Act (GST Act) for the financial year 2017-18 represents the credit taken based on annual mix of products covered under GST and products not covered under GST.
■ Tax refund: The company has recognized tax refund of Rs.776 mn under the Income Tax Act, 1961 and deferred tax asset of Rs. 119 mn in Q3FY19.
■ Net Loss: The Company has reported net loss of Rs.2.7 bn in Q3FY19.
■ Marketing initiatives: The Company has increased its market presence by way of direct marketing of its products Petcoke, Sulphur and Polypropylene. The company is increasing the product grades of Polypropylene to enhance Polypropylene (PP) market share and thereby fetch higher margins.
■ The Company has bagged the prestigious “FieldComm group 2018 Plant of the Year” Global award conferred by FieldComm group. The Company is the first Indian company to receive this International award.
■ New expansion plans in place – Growth is a process: MRPL has set-up the next milestone and is planning to enhance its refining capacity to 25 mmtpa (19% higher than targeted) as against an earlier target of 21 mmtpa and current capacity of 15.5 mmtpa. Additionally, the company is planning to scale up its petrochemical capacity to boost its margins. The Company will invest Rs.110 bn in this expansion. We like the sharpened focus of the company on the growth strategy. The expansion is seen as a major margin driver as it will help the company to process cheaper, heavier crudes into high-value products like diesel, liquefied petroleum gas and propylene.
■ MRPL is venturing into RLNG business: MRPL has signed a memorandum of understanding (MOU) with new Mangalore Port Trust to study the feasibility of setting up an LNG re-gasification terminal at Mangalore. We believe this is at a preliminary stage and will have a long gestation period. However, if materializes then it will help MRPL to lower its refinery operating cost by replacing costlier liquid fuel with cheaper LNG.
■ Re-commencing retail outlets: The Company has commissioned COCO (company owned and company operated) retail outlet in Mangalore in Feb’18 and also commissioned its first ever dealer owned dealer operated retail outlet at Mandya in March’18. In Karnataka, this is the sixth RO for MRPL. MRPL has drawn up plans for opening over 100 retail outlets which will improve its overall margins due to addition of marketing margins. The company is in the process of obtaining statutory approvals. MRPL has also taken over retail outlet of ONGC set up near the refinery unit and has now become a part of MRPL retail outlet map.
■ Auto fuel up-gradation: MRPL is in the process of upgrading its facilities to produce BS-VI grade MS& HSD by April 2020 in-line with the Supreme Court directive and Auto fuel upgradation policy of Govt of India.
We have revised our earnings lower to reflect weak GRMs and inventory losses. Hence, we now expect MRPL to report an EPS of Rs.10/share in FY20E (earlier Rs.10.9). At current price, the stock is trading at 6.5x P/E and 0.9x P/B multiples on FY20E earnings. We maintain BUY on MRPL with a revised price target of Rs.81 (earlier Rs.92), valuing it at 5.5x FY20E EV/EBIDTA. We expect stock to remain in focus on the news flow of merger with HPCL, we opine.
Going ahead, we expect MRPL’s profitability to improve on account of i). Improved product mix, ii). Better refining margins iii). Economies of scale, iv). Forward integration - Polypropylene plant and v). Various tax benefits.
■ Wide fluctuations in crude, forex and product prices can impact the margins.
■ If global supply exceeds demand then margins can be under pressure.
■ Any delay in executing the project can significantly impact the valuations.
Mangalore Refinery and Petrochemicals Ltd. (Mini-Ratna status) is a pure play crude oil refiner with strong promoter backing of ONGC (India's biggest government owned exploration Company). MRPL has transformed itself into a large and complex refinery with phase-III capacity expansion and has emerged into a much stronger player in the industry.
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ADD - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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