Initiating Coverage - Mangalore Refinery & Petrochemicals (Buy): At the crack of dawn... - ICICIDirect

Mangalore Refinery & Petrochemicals (MRPL), a standalone refinery with a capacity of 15 MMTPA, is all set to complete its Phase III expansion and upgradation project, to enter the league of complex refineries. While the capacity of MRPL has already increased from 11.8 MMTPA to 15 MMTPA, the commencement of operations at all secondary processing units shall enhance the complexity of the refinery from six to 10. The operational efficiencies that will kick in due to higher complexity will boost refining margins from US$2.5/barrel in FY13 to US$4.5/barrel and US$5.7/barrel in FY15E and FY16E, respectively. We expect MRPL to grow at a CAGR of 4.4% in revenues over FY13-16E on the back of higher capacity utilisation and realisation due to rupee depreciation. We expect the company to report a net profit of Rs. 650.2 crore and Rs. 1096.2 crore in FY15E and FY16E, respectively, against a loss of Rs. 756.9 crore in FY13. We initiate coverage on MRPL with a BUY rating.

Capacity expansion & upgradation project to boost refining margins

Higher complexity on commissioning of Phase III project will lead to an increase in distillate yield from 76.5% to 80.1%, better capability to handle heavier & sourer crude and production of higher margin value-added products. Additionally, MRPL would save on freight cost due to the single point mooring facility, commissioned in August 2013. We believe these benefits will translate into an improvement of US$3.5-4/barrel in refining margins in the next couple of years.

Best placed to play refining cycle among PSU peers

MRPL has managed its business better than its peers in terms of better cash conversion cycle (only PSU refinery which has a negative working cycle), which is mainly due to the higher percentage of sourcing of crude from NIOC of Iran that offers a 90 day credit period. The recent truce between Iran and the six western nations will benefit MRPL in terms of better credit period, lower pressure on working capital & reduction in interest expense. Also, the completion of Phase III project will allow MRPL to regain its edge over peer PSU refiners in terms of GRMs. Overall, we prefer MRPL because of its lower policy leverage, improving GRM outlook and lowest gearing on the balance sheet amongst PSU refineries.

An investment opportunity; ready to unfold

Given the improvement in complexity, better distillate yield and access to cheaper crude oil, we expect MRPL to achieve higher profitability. We value the stock at 5.5x FY16E EV/EBITDA multiple to arrive at a target price of Rs. 61. We initiate coverage on MRPL with a BUY recommendation.

Source : Equity Bulls

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