Benefit of phase III projects few quarters away • MRPL :: ICICI Securities, link

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MRPL: Buy :: Business Line

MRPL’s expansion to refine margins - BUY :: Business Line

MRPL’s core GRM disappointed by coming in at $ 1.36/bbl in Q3 FY12 ::LKP Research

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MRPL’s core GRM disappointed by coming in at $ 1.36/bbl in Q3 FY12 vs. $ 4.84/bbl q-o-q & $ 1.86/bbl y-o-y; however, inventory gain of $ 6/bbl compensated for forex loss of $ 3.65/bbl during the quarter.

Inventory gain to the rescue as core GRM drops

Core GRM dropped from $ 4.84/bbl in Q2 FY12 to $ 1.36/bbl in Q3 FY12, which exceeded the fall in Singapore complex GRMs from $ 9.1/bbl to $ 7.9/bbl in the same period. Persistent depreciation of the rupee saw forex losses increasing from ($ 3.15/bbl) to ($ 3.65/bbl) in the same period. However, inventory gain at $ 6/bbl was a positive surprise. Thus, gross GRM jumped from $ 1.66/bbl in Q2 FY12 to $ 3.75/bbl in Q3 FY12.

Q3 FY12 throughput affected by CDU/VDU & Hydrocracker revamp

Throughput for Q3 FY12 was 3.04 MMT compared to 3.08 MMT in Q2 FY12 & 3.49 MMT in Q3 FY11. This was due to revamp activities during the quarter for the CDU/VDU I & Hydrocracker I units. Following the completion of the revamp jobs, the plants have been declared mechanically completed and the units are back on stream.

Net sales up 11% q-o-q & 26% y-o-y

Net sales increased 25.6% y-o-y to Rs 129,668.4 mn mainly on account of higher product prices, led by diesel & gasoline. Sales was also up 11.3% q-o-q due to shutdown of the CDU/VDU during Sept 2011. Exports increased to 43.5% of sales in Q3 FY12 as against 34.5% in Q3 FY11, led by fuel oil which is getting replaced by natural gas in the domestic market.

Capacity expansion to improve performance significantly

Going forward, excellent product slate of the expanded refinery, due to reduction in fuel oil and introduction of polypropylene, is expected to result in GRM jumping by ~$ 3.5/bbl during FY12-13. Realization for PP is currently ~$ 1300/ton, which is almost double that of other refined products. We estimate GRM of $ 5/bbl and $ 8.4/bbl in FY12 & FY13 respectively. GRM will be even significantly higher if the company is granted the various tax incentives for its expanded refinery.

We expect EBITDA to double from Rs 17,805.8 mn in FY12 to Rs 35,172.6 mn in FY13. We estimate adjusted PAT of Rs 9,410.8 mn & Rs 13,719.4 mn in FY12 & FY13 respectively. We revise our FY12 & FY13 adjusted EPS estimates to Rs 5.4 & Rs 7.8 respectively.

Valuation

We value MRPL using a target EV/EBITDA multiple of 5x on FY13E EBITDA and reiterate BUY with a target price of Rs 74, which translates to upside of ~25%.

MRPL - "Fx loss mars operational performance":: LKP

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MRPL earned core GRM of $ 4.84/bbl in Q2 FY12 vs. $ 4.3/bbl q-o-q & $ 3.82/bbl y-o-y; however, steep depreciation of the rupee against the US dollar resulted in forex loss of $ 3.15/bbl during Q2 FY12.

Strong operating performance negated by steep rupee depreciation

Core GRM jumped from $ 4.3/bbl in Q1 FY12 to $ 4.84/bbl in Q2 FY12, mirroring the improvement in Singapore complex GRMs from $ 8.5/bbl to $ 9.1/bbl in the same period. However, drastic depreciation of the rupee against the US dollar saw forex losses also leaping from ($ 0.76/bbl) to ($ 3.15/bbl) in the same period. Thus, gross GRM declined from $ 3/bbl in Q1 FY12 to $ 1.66/bbl in Q2 FY12.

Q2 FY12 throughput affected by CDU/VDU revamp

Throughput for Q2 FY12 was 3.08 MMT compared to 2.87 MMT in Q2 FY11. However, the same was lower than Q1 FY12 throughput of 3.3 MMT due to shutdown of 4.68 MMT CDU/VDU for facilitating final hook up job for revamp of the unit. The plant has been declared mechanically completed and the CDU/VDU has been brought back into operation. Also, the hydrocracker unit was shut down as per schedule for revamp work. The revamp job has been completed and the unit is back on stream.

Capacity expansion to improve performance significantly

Going forward, excellent product slate of the expanded refinery, due to reduction in fuel oil and introduction of polypropylene, is expected to result in GRM jumping by ~$ 3.5/bbl during FY12-13. Realization for PP is currently ~$ 1500/ton, which is almost double that of other refined products. We estimate GRM of $ 5.1/bbl and $ 8.7/bbl in FY12 & FY13 respectively. Commissioning of SPM is expected to result in lower transportation costs and corresponding increase in GRM. GRM will be even significantly higher if the company is granted the various tax incentives for its expanded refinery.

We increase our FY12 revenue estimate to Rs 446,623.3 mn due to higher than expected throughput during Q2 FY12. We expect EBITDA to double from Rs 16,803.6 mn in FY12 to Rs 32,557.9 mn in FY13. We estimate PAT of Rs 9,186 mn & Rs 12,658.8 mn in FY12 & FY13 respectively. We revise our FY12 & FY13 EPS estimates to Rs 5.2 & Rs 7.2 respectively.

Valuation

We value MRPL using a target EV/EBITDA multiple of 6x on FY13E EBITDA and reiterate BUY with a target price of Rs 81, which translates to upside of above 30%.

MRPL: Buy:: Business Line,

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Investors with a long-term perspective could consider buying the stock of refiner MRPL, an ONGC subsidiary. Along with attractive valuation, the company's refinery expansion plans, which should boost its earnings over the next year, support our recommendation. The MRPL stock after gaining strongly in the first quarter of this fiscal on the back of impressive March quarter results, has tanked around 25 per cent since July-end. This was mainly due to the company's lacklustre show in the June quarter (on a sequential basis) which compounded the effect of jittery market conditions.

MRPL's gross refining margin (GRM) — the difference between the value of the product slate and the cost of crude oil — which was as high as $9.09 a barrel in March 2011 fell to $2.99 in the June quarter. Inventory loss due to volatility in crude oil prices was mainly responsible for the poor show. Still, the company's did better compared with the June 2010 quarter (GRM of $1.97). Consequently, MRPL posted a profit of Rs 173 crore in the June quarter compared to Rs 553 crore in the March quarter and Rs 28 crore in the June 2010 period. At its current market price of around Rs 62, the stock discounts its trailing twelve month earnings by 8.2 times, more expensive than Chennai Petroleum (6 times) but cheaper than Essar Oil (9.2 times). At present levels, MRPL also trades cheaper than its historical average. With many refiners in the West curtailing operations, the refining market environment in Asia is showing an improvement, despite the ongoing uncertainty in the global economy. This should help MRPL's performance in the near-term. That said, the risk that deterioration in the global economic scenario will impact demand for refined products and crimp GRMs, does exist. Also, the company plans a revamp related shutdown of some of its units in the coming months, which could impact earnings in the short-term.

MARGINS TO GET A BOOST

Despite these near-term concerns, the company's ongoing refinery expansion programme, and other initiatives such as the single point mooring (SPM) facility, are long-term positives. Notwithstanding some time overrun due to local protests, there has been good progress (around 86 per cent complete) on the Phase III of the refinery expansion, and the project is expected to be commissioned by January or February 2012.

This should increase capacity substantially from the current 11.8 million tonnes annually to 15 million tonnes. In addition, the refinery's complexity is expected to improve from 5.5 currently to 9, giving the company the ability to process cheaper, heavier crude oil and boost GRM. The expansion will also help MRPL improve its middle distillate yield from around 52 per cent to 63 per cent, which will aid earnings. Other value-added products such as polypropylene will also be produced.

Another project which should improve logistical efficiency and help broad-base MRPL's crude oil supplier base is the ongoing construction of the SPM facility (around 30 per cent complete). The facility expected to be completed by May 2012, will enable the company to receive crude oil in very large crude containers (VLCCs). While MRPL has been able to tide over the oil payment crisis pertaining to Iran (its major supplier currently), it is looking to expand its crude oil basket to de-risk its position.

The SPM facility should aid this cause.

On the retailing front, MRPL has a joint venture with Shell for marketing ATF and directly sells products such as bitumen, furnace oil and naphtha whose prices are not controlled. However, its miniscule presence in the retailing of controlled fuels such as diesel shields it from the under-recovery burden.

MRPL - "Poised to take off" ::LKP

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Key highlights

Ø  MRPL’s Q1 FY12 results were significantly better y-o-y with net sales up 70.5% & PAT up 506.9%.

Ø  Core GRM jumped from $3.1/bbl in Q4 FY11 to $4.3/bbl in Q1 FY12, mirroring the sequential improvement in Singapore complex GRMs from $7.4/bbl to $8.5/bbl in the same period.

Ø  While net sales was up 8.3% q-o-q, operating profit was down 64.4% q-o-q as a result of inventory gain falling from $6/bbl in Q4 FY11 to ($0.5/bbl) in Q1 FY12.

Ø  Net sales increased 70.5% yoy and 8.3% qoq to Rs 134,346 mn mainly on account of higher product prices, led by diesel & gasoline. Throughput for Q1 FY12 was 3.3 MMT which is ~ 13.4% higher than throughput of 2.9 MMT in Q1 FY11.

Ø  Core GRM for Q1 FY12 was $4.3/bbl compared to $3.1/bbl in Q4 FY11 and $ 4.5/bbl in Q1 FY11.

Ø  As a result, net profit for Q1 FY12 was up 506.9% yoy at Rs 1,727.1 mn. EPS for the quarter was Rs 1, a tremendous improvement over the Q1 FY11 EPS of Rs 0.2.

Outlook and Valuation

Going forward, excellent product slate of the expanded refinery, due to reduction in fuel oil and introduction of polypropylene, is expected to result in GRM jumping by ~$ 3.5/bbl during FY12-13. Realization for PP is currently ~$ 1500/ton, which is almost double that of other refined products. We estimate GRM of $5.8/bbl and $9.5/bbl in FY12 and FY13 respectively. Commissioning of SPM is expected to result in lower transportation costs and corresponding increase in GRM. GRM will be even significantly higher if the company is granted the various tax incentives for its expanded refinery.

We forecast net sales of Rs 375,107.6 mn and Rs 419,488.2 mn in FY12 and FY13 respectively. We expect EBITDA to jump from Rs 18,939 mn in FY12 to Rs 38,164.5 mn in FY13. We estimate PAT of Rs 8,583.5 mn and Rs 16,687.1 mn in FY12 and FY13 respectively. We expect EPS to leap from Rs 4.9 in FY12 to Rs 9.5 in FY13.

We value MRPL using EV/EBITDA valuation and maintain BUY with a FY12E target price of  Rs 109, which translates to upside of 36.3%.  We have used EV/EBITDA multiple of 6.25x on FY13E EBITDA to arrive at our price target.

MRPL & Essar Oil - " Play the Refining Theme":: LKP

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A combination of high crude prices and sustained product demand is resulting in strong product spreads which has positioned pure refiners in a sweet spot. This is best manifested through a cursory glance at the benchmark Singapore GRM which is going strong at $ 8.8/bbl during the quarter-to-date. To put things in perspective, the Singapore GRM during Q1FY11 was just $ 4.1/bbl, which represents more than doubling of refining margins y-o-y. Refining margins have also risen sequentially from $ 7.5/bbl in Q4FY11 to $ 8.8/bbl during the quarter-to-date. Currently, Singapore GRM is ranging between $ 8-8.5/bbl, which is expected to result in very favorable economics for pure refiners.

Sector Dynamics

A sweeping glance through the oil sector reveals a host of issues that are dogging the sector as a whole and some company-specific issues which are acting as a drag on the respective stocks. The over-arching issue of the adhoc subsidy sharing mechanism is taking its toll on the PSU space. Crude prices of $ 110+/bbl threaten to complicate the scenario considerably. The recent move to arbitrarily increase the subsidy burden on the upstream sector to ~39% has severely impacted the stocks. With the finances of the PSU OMCs held hostage to grants by the Govt., it has become very difficult to estimate future performance.

On the other hand, falling output from the KG D6 block threatens to overturn the capacity utilization calculations of various gas pipeline operators which may result in adverse near term performance. The Cairn-Vedanta deal, which was announced 10 months ago, is proving to be a case of indecisiveness in policy-making at the highest levels with opposing pulls & pressures from all sides. The interim CAG audit report on KG D6, Rajasthan & PMT fields couldn’t have come at a worse time for a sector that is already battling a multitude of headwinds.

MRPL & Essar Oil best positioned

We believe that the refining space within the oil sector is best positioned for a take-off, aided by strong fundamentals and availability of companies which are expanding their capacities at the most opportune time to capitalize on the refining cycle. With the sword of under recoveries not hanging over them, we believe MRPL & Essar Oil offer the best bets to play the refining theme.

Valuation

We value MRPL using EV/EBITDA multiple of 6.25x on FY13E EBITDA and arrive at our price target of  Rs.115, which translates to a hefty upside of 58.7%. MRPL is our top pick to play the strong refining cycle.

We value Essar Oil using SOTP valuation. We value the refinery using 6.25x FY13E EV/EBITDA and the Mehsana and Raniganj blocks using DCF. We value the Ratna/R-series & Nigerian blocks using EV/boe multiple. We upgrade our rating on the stock to BUY with a target price of Rs.187, which translates into an upside of 59.3%.