Mangalore Refinery & Petrochemicals- Mystery shrouds valuation:: Elara

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Mystery shrouds valuation
Current valuations portray bull case scenario
We initiate the research coverage on MRPL with a Sell rating and a
target price of INR70/share, a downside of 14% from current levels.
We feel current valuations are extremely rich with very high earnings
expectations. We estimate that the current valuation factors in GRMs
of nearly USD9+/bbl along with an EV/EBITDA of 8x+ for FY13, a very
bull-case scenario. Though MRPL is successfully implementing the
capacity expansion project (from 11.8MMT to 15MMT), the stock looks
expensive even after factoring in the full year earnings potential of
FY13 post the expansion and complexity upgrade.


Recent run-up in the stock unwarranted
MRPL’s shares have rallied nearly 15% since the deregulation
announcement by the Government, while similar refiners such as CPCL
and Essar have rallied only 2-7%. Reliance, India’s refining bellwether,
has been almost flat during this period reflecting concerns over a
subdued refining outlook. Thus, we find the MRPL run-up
unwarranted and expect a pull back to more comparable valuations
soon. One explanation for the rally can be MRPL’s plans to expand its
fuel retail outlets after the diesel de-regulation though we would like
the investors to note that currently it has only one outlet and the plan
to roll-out nearly 500 outlets has been on the table for a while now,
without much execution. Also, even if the diesel de-regulation takes
place in the medium term, with the MRPL’s focus and funding -
primarily aimed at the refining business enhancement, retail marketing
is likely to take a backseat in the medium term, in our opinion.

Global refining outlook remains subdued
The US and European refiners have continued to moderate their
refinery runs in an effort to recover margins lost since mid-CY10. Also,
with the Asian maintenance season coming to an end, it should add
some capacity into the markets. Overall, product markets continue to
be weak and thus we expect soft GRMs over the next 2-3 quarters.

Valuation
We arrive at our target price of INR70/share by applying an
EV/EBITDA of 6.5x on MRPL’s FY13 earnings - its first full year of
operations post the expansion in its refining capacity and
enhancement in its complexity - leading to substantially higher
GRMs. We have assumed GRMs of USD8.5/bbl for MRPL in FY13.
We believe that our target multiple is fair, considering that most
complex refiners in the region, including Reliance, are trading at an
EV/EBITDA of 8x on FY12 earnings. For FY13 multiple, we have
taken a 20% discount on the FY12 multiple. Purely, from a valuation
perspective, we believe that there are more attractive options such
as CPCL and Essar available for investors to take exposure to India’s
refining story.