Buy Mangalore Refinery; target of Rs 110: ICICI Direct

ICICI Direct's research report on Mangalore Refinery

Mangalore Refinery & Petrochemicals (MRPL), a standalone refinery with a capacity of 15 MMTPA, has completed and commissioned its Phase III expansion and upgradation project, to enter the league of complex refineries. The operational efficiencies that have kicked in due to higher complexity will boost refining margins from US$5.3 per barrel in FY16 to US$6.6 per barrel and US$6.7 per barrel in FY18E & FY19E, respectively. We expect MRPL to grow at a CAGR of 26.5% in EBITDA over FY16-19E on the back of higher refinery complexity, better crude sourcing and increased operational efficiency. We expect the company to report net profit of Rs 2060.8 crore and Rs 2110.5 crore in FY18E & FY19E, respectively against a loss of Rs 1148.2 crore in FY16.

Overall, MRPL has lower policy leverage and lower gearing on the balance sheet among PSU refineries. With the improvement in operational performance, we expect the standalone company to deliver better profit, thus creating value for shareholders in coming years. The performance of ONGC Mangalore Petrochemicals (OMPL) remains crucial in determining the overall performance of the company. For FY16, OMPL posted revenue of Rs 4187.6 crore and a loss of Rs 875.4 crore. However, the management has indicated that its performance would improve in coming years. A scheme of amalgamation of MRPL with OMPL has been proposed for approval of various regulatory authorities. We introduce FY19E estimates and value the stock at 6x FY19E EV/EBITDA multiple and OMPL at Rs 7.6/share to arrive at a target price of Rs 110.