PL Stock Report: Manglore Refinery & Petrochemicals (MRPL IN) - Company Update – Declining GRMs a concern - HOLD

Manglore Refinery & Petrochemicals (MRPL IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: HOLD | CMP: Rs100 | TP: Rs94

Company Update – Declining GRMs a concern

Quick Pointers:

§ Decline of US$1/bbl in GRM to impact EBITDA by Rs10bn.

§ Concerns persist on sustainability of strong GRMs, amidst demand concerns.

Mangalore Refinery Petrochemicals (MRPL) has a 15mmtpa refinery with Nelson Complexity Index of 11.3 that boasts of a polypropylene plant of 440ktpa and 1.2mmtpa PX/benzene capacity at ONGC Mangalore Petrochemicals Ltd. The PX facility has been recently revamped and can produce reformate or PX depending upon demand-supply dynamics. MRPL’s refining margins are likely to be impacted in the near term due to Singapore GRMs weakening amid demand concerns. We estimate a GRM of US$6/bbl for FY24/25E. The older issue of unavailability of water supply has been resolved with commencement of desalination plant in CY21. The company is trading at a PE of 4x. We assign ‘HOLD’ rating with a TP of Rs 94 based on 5x FY26 EV/EBITDA.

Product cracks soften amid demand concerns: Petrol cracks have fallen from an average of US$10.7/bbl in Sep’23 to an average of US$3.2/bbl in Oct’23 amidst rising inventory in the US, indicating demand concerns. However, diesel cracks continue to remain strong at US$26.2/bbl.

Rising refinery utilizations also add to supply: As few large refineries globally have come out from their maintenance, we see refining utilizations rising from 92% in Apr-Jun’23 to 94% in Jul-Aug’23 for US. Similarly, utilization levels across Asian countries have moved up in the same period, while Europe has largely remained flat.

Weak Singapore GRMs to raise concerns on MRPL’s GRMs: Singapore GRMs have fallen to an average of US$5.5/bbl in Oct’23 from an average of US$9.4/bbl in Sep’23. This fall is mainly due to decline in petrol cracks and could impact GRMs of MRPL, although not commensurately.

Entry into small petchem projects positive: The company is in the process of identifying few small petrochemical projects which would require total investment of Rs60-80 bn. Progress on these projects would likely happen within 2-3 years and provide import substitution opportunity. In the longer run, the company also plans to invest in a large petrochemical project in partnership with ONGC with expected investment of Rs400bn. We believe such a large scale project may stretch company’s balance sheet in the future.

Valuation and recommendation: Every US$1/bbl change in GRM impacts MRPL’s operating profit by Rs10bn. At a GRM of US$6/bbl, the company would be able to generate a free cash flow of Rs14bn, which would help reduce net debt from current level of Rs140bn to Rs107bn. We value MRPL at 5x FY26 EV/EBITDA and recommend ‘Hold’ rating with a target price of Rs 94/share. Sensitivity of valuation to GRM is very high. If we assume a GRM of USD7/bbl, then target price will be Rs 126/share.

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