Contents in today's MORNING INSIGHT
¾ Economic News
¾ Corporate News
Result Update: MRPL
¾ MRPL's result is better than our and market expectations. In Q1FY17, the company reported a PAT of Rs.7.2 bn, higher by 77% yoy mainly on account of better GRMs. MRPL's refining margin stood higher at $10.01/bbl in Q1FY17 as compared to $8.24/bbl in Q4FY16 mainly on account of products like Polypropylene and Pet Coke generated out of the new phase III secondary units and presumably inventory gains. The company has established strong market presence by way of direct marketing of its products petcoke, sulphur and polypropylene. MRPL has gained more than 35% market share in Polypropylene in the south zone.
¾ MRPL has drawn up plans for opening over 100 retail outlets which will improve its overall margins due to addition of marketing margins. Currently, the company is in the process of obtaining statutory approvals. Further, the company has also taken over retail outlet of ONGC set up near the refinery unit.
¾ We expect going ahead, the 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. At current price of Rs.79, the stock is trading at 6.9x P/E and 1.5x P/B multiples on FY18E earnings. We believe that the stock is close to fairly valued at 6.1x FY18E EV/EBIDTA and hence, we maintain ACCUMULATE rating with a revised price target of Rs.87 (earlier Rs.77), valuing it at 6.5x FY18E EV/EBIDTA (Peers trading at 7-8x).
Market Strategy
¾ Markets ended August with strong gains on strong FII inflows and status quo from RBI on rates. The immediate focus of the markets would now be on the timeline of rate hike by US Fed going forward. Probability of Fed rate hike has weakened after the tepid non-farm payrolls data. Oil prices would also remain in focus with the scheduled informal meeting of OPEC countries towards the end of September, on output freeze.
¾ Domestically, focus would be on fast-tracking of domestic reforms, pace and distribution of monsoons as well as fixing of GST rate prior to the its likely implementation by April 2017. High CPI owing to soaring food prices has quashed hopes of rate cut from RBI in near term. However, there is a likelihood that, consumer inflation will ease post September, backed by a good monsoon received this year.
¾ Although, the investor sentiment remains positive, one should be wary of market valuations which have now breached the 18x FY17 earnings mark. Markets are currently factoring in most of the positives related to earnings as well as monsoons. Thus, we would advise caution while trying to participate in the on-going rally. One must re-calibrate asset allocation in favour of stocks which have sustainable competitive advantage and consistent cash flows. We maintain our preference for companies having strong balance sheets and ethical managements.
¾ With continuous action of government in reviving infrastructure sector, we expect select construction companies and banks to benefit from the same. We are also positive on sectors which could be positively impacted by GST (select stocks in Logistics, Auto, Media, Building Materials, Cements etc.), government spending (Roads and Railways) and rural demand revival (cement, paints, FMCG, etc). Key risks to our recommendation would come from geopolitical concerns globally, decline in foreign inflows, sharp currency movements and further spike in oil prices.
Bulk deal
Gainers & losers
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