New Retail Outlets And Refining Projects Will Shape Future Success

Key Takeaways

• Operational focus on value-added products and increased retail outlets may enhance revenue growth and market penetration.
  
• Infrastructure and sourcing improvements could boost net and refining margins through cost reduction and optimization.
  
• High debt levels and increased competition, coupled with volatile margins, could strain financial flexibility and pressure future revenue and earnings.

Catalysts

Engages in the manufacture and sale of refined petroleum products in India and internationally.

• The operational strategy of maximizing value-added products such as aviation turbine fuel and benzene, along with improving product flexibility, suggests potential improvements in overall revenue and gross margins.
  
• The planned expansion of retail outlets from 167 to over 330, aiming to increase diesel and petrol sales, indicates potential revenue growth and improved market penetration.
  
• The ongoing reduction in fuel and loss, bolstered by the grid infrastructure project, could lead to improved net margins by reducing operational costs.
  
• The increased sourcing of higher-grade crudes and diverse crude sources could enhance refining margins by optimizing the crude slate for better economic returns.
  
• The commissioning of new projects such as the isobutyl benzene plant and bitumen train, targeting operational derisking and higher capacity utilization, could positively impact future earnings by increasing production efficiency and expanding product lines.

Mangalore Refinery and Petrochemicals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mangalore Refinery and Petrochemicals's revenue will decrease by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 4.9% in 3 years time.
• Analysts expect earnings to reach ₹37.9 billion (and earnings per share of ₹21.49) by about May 2028, up from ₹562.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 417.3x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 16.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.55%, as per the Simply Wall St company report.

Mangalore Refinery and Petrochemicals Future Earnings Per Share Growth

Risks

• High debt levels with a net debt to equity ratio of almost 1.0 can impact the company's financial flexibility and increase interest expenses, potentially affecting net margins.
  
• The company's reliance on value-added product optimization to maintain gross refining margins amidst weaker benchmark margins indicates potential volatility, which could impact overall revenue stability.
  
• Increased competition from new refining capacity being added domestically and internationally may put pressure on pricing and margins, influencing future revenue and net income.
  
• Declining discounts on Russian crude and an uncertain crude sourcing landscape suggest increased procurement costs, impacting earnings and margins.
  
• Large planned capital expenditures (₹1,000 crores annually for the next two years) might strain cash flows while not guaranteeing a proportional increase in revenue, potentially affecting net margins and earnings if not effectively managed.

Valuation

• The analysts have a consensus price target of ₹120.5 for Mangalore Refinery and Petrochemicals based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹136.0, and the most bearish reporting a price target of just ₹105.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹777.0 billion, earnings will come to ₹37.9 billion, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹133.85, the analyst price target of ₹120.5 is 11.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.