Key takeaway: HPCL reported a 9% EBITDA beat. Operating results were weak with a large miss in refining and marketing boosted by inventory gains. Fire-affected CDU in Vizag hurt refinery throughput (will impact 2QFY22 also). With OMCs holding auto fuel prices steady amid weakness in Brent, HPCL’s marketing leverage is coming into play. We raise FY22E earnings by 3% on higher inventory gains leaving FY23E broadly unchanged, maintain ‘buy’ on favorable valuation.
Ahead of est: Reported EBITDA was 9% ahead of JEFe despite a large miss in refining as marketing inventory gains came significantly ahead of JEFe (company didn’t disclose the gains separately). Reported PAT was 3% ahead of JEFe on lower net interest income.
Refining disappoints: Reported GRM of $3.3 came well short of JEFe ($ 5.8). Core GRM would have been weak as distillate yield fell 10% q-o-q. Company didn’t disclose segmental Ebitda or inventory gains separately. Refinery throughput declined 37% y/y to 2.5 mmt on fire-related closure of one of the CDUs at the Vizag refinery and came in lower than JEFe (2.9mmt). The CDU will start mid-August impacting 2QFY22 as well.
Marketing aided by inventory gains: Marketing volumes declined 14% q-o-q. We reckon marketing accounted for most of the reported Ebitda in 1Q as refining was fairly weak. Marketing volumes +16.8% y/y against +18.6% for the industry resulted in 30bps market share loss in gasoline and almost flat market share in diesel q/q.
Sgp GRM outlook mixed: Trafigura, in its recent Jef U interaction, indicated it expects gasoline spreads to strengthen further on higher-than-normal demand during the US driving season in June-July. Naphtha should also remain strong on downstream demand. But the outlook on diesel is mixed with India demand still down 10% y/y and weakness in global aviation fuel demand (-40% y/y). We expect refining margins to go back to their past cycle average in 1HCY22.
Better-than-normative marketing margin at current crude price: Retail prices of gasoline and diesel have increased by Rs 9-11/lt since the elections ended. OMCs have not reduced retail price even as crude has come off 8% from its recent peak. At the current crude price ($71/bbl), our calculations suggest diesel margins at Rs 4/lt and gasoline margin at Rs 2.5/lt. HPCL has the highest leverage to increasing marketing margin on auto fuels.
Maintain ‘Buy’ on favourable valuation: HPCL trades at 1 s.d. below historical average on P/B and near the average EV/Ebitda multiple of the last refining cycle. With OMCs holding retail price of auto fuels steady amid weakness in crude, HPCL’s marketing Ebitda will receive a boost. However, a sustained recovery in GRM to past cycle average is required for out-perf. Maintain ‘buy’ on HPCL with an unchanged price target of Rs 370.