Estimates revised to take into account headwinds; ‘Buy’ maintained with TP cut to Rs 92 from Rs 100
We expect weak GRMs to be a common feature amongst all refiners in this quarter; this is partly due to volatile crude oil price, weak refining margins coupled with substitution of cheaper heavier Iranian crude with expensive crude from other sources. However, Indian state refiners have made nominations for Iranian oil for January loading, post temporary relaxation from US.
Margin under pressure
Benchmark Singapore refining margin has declined 10% qoq to $5.4/bbl (average) in Q3FY19 and is currently trading at around $4/bbl due to weak global product demand. Petrol spread has declined meaningfully by 50% qoq to $4.1/bbl in Q3FY19. In H1FY19, MRPL’s average GRMs stood at $6.29/bbl. We expect the company to report significantly lower GRMs in Q3FY19.
Brent crude oil price has corrected by 35% from $82.72/bbl (as of 28th September’18) to $53.80/bbl (as of 31st December’18). We expect, MRPL to report inventory losses which will further put pressure on the earnings.
MRPL is implementing phase III expansion plans, upgrading its refinery to meet BS VI norms and also forward integrating by setting up a polypropylene unit. In general, Indian refiners will have to shut gas oil and gasoline making units at their plants for 15 to 45 days to churn out Euro-VI compliant fuels from January, 2020. This will impact the crude throughput in FY20, we opine.
In the medium to long term, the key factors to watch are GRMs, rupee movement against US dollar, capacity expansion & upgrade and petroleum product demand.Further, investors are waiting for an announcement of the swap ratio for merger of MRPL with HPCL.
Valuation & outlook
We have revised our earnings lower to reflect weak GRMs and inventory losses. However, rupee depreciation, lower operating cost, and lower working capital requirement resulting in lower interest cost will partly mitigate the negative impact. Hence, we now expect MRPL to report an EPS of Rs 5.4/share in FY19E (earlier Rs 8.9) and an EPS of Rs 10.9/share in FY20E.
At current price, the stock is trading at 6.6x P/E and 1.0x P/B multiples on FY20E earnings. We maintain Buy on MRPL with a revised price target of Rs 92 (earlier Rs 100), valuing it at 5.5x FY20E EV/EBIDTA. We expect the stock to remain in focus on the news flow of merger with HPCL. 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.