HPCL's Q2FY18 results (Outperformer) - In line earnings, core GRMs disappoint
Q2FY18 highlights
- Adjusted PAT of Rs17.3bn (IDFCe Rs17bn) improved 147% yoy, helped by inventory gain of US$2/bbl in refining (Rs4.5bn) and Rs3.4bn in marketing. EBITDA of Rs29.1bn (+130% yoy, IDFCe Rs29.7bn)
- Excluding inventory impact, core refining metrics were relatively weak, with a US$5.5/bbl core GRM, implying a miss of US$2.7/bbl to Singapore benchmarks. However, marketing volume growth of 4.4% in domestic volumes (6.7% overall) was above industry volume growth of just 1.3% in Q2.
- Marketing margins of 4305/ton, down 6/11% yoy/qoq. The decrease in blended margins is driven by a decline in gross margins for petrol/diesel qoq. Management has however guided to an improvement in the same over Q3, with current gross margins at ~Rs3/ltr for both fuels vs ~Rs2.8 in Q2.
- Refining thruput of 4.64mt implies utilisation of 115%, with a distillate yield of 76% and a high sulphur crude % of ~60%. Reported GRMs at US$7.6/bbl including inventory gain of US$2/bbl.
Key positives: Strong refining thruput and yields, higher than industry volume growth.
Key negatives: Weak core GRMs driven by some technical issues at Mumbai refinery
Impact on financials: Reduced FY18/19E EPS by 1.6/1.8% to factor lower GRMs offset by marginally higher marketing volumes/margins. TP rolled over to 10x FY20E adjusted consol EPS at unchanged Rs570/sh.
Valuations & View
The miss on refining margins for the quarter notwithstanding, we remain positive on HPCL’s prospects over FY18-20E. In refining, we believe the reasons for miss vs estimates in Q2 will not spill over into H2 and the improving distillate yields, higher high sulfur crude and improving configuration should lead to GRMs sustaining at >US$7/bbl over FY18-20E, With a steady recovery already underway in marketing volumes and the substitution of higher margin LPG and industrial products replacing lower margin products like Kerosene and some improvement guided to for key products petrol/diesel as well over H2FY18E, we see margins steadily improving for marketing as well. Coupled with healthy profits at subsidiary/associates MRPL/HMEL – consol EPS should grow at ~6% CAGR over FY18-20E. Reiterate outperformer
Hindustan Petroleum is engaged in the refining and marketing of petroleum products. Co. operates 2 major refineries producing a wide variety of petroleum fuels & specialties, one in Mumbai (West Coast) of 6.5 Million Metric Tons Per Annum (MMTPA) capacity and the other in Vishakapatnam, (East Coast) with a capacity of 8.3 MMTPA. Co. also owns and operates a Lube Refinery producing Lube Base Oils of international standards, with a capacity of 428 TMT. Co.'s marketing network is facilitated by a Supply & Distribution infrastructure comprising Terminals, Pipeline networks, Aviation Service Stations, LPG Bottling Plants, Inland Relay Depots & Retail Outlets, Lube and LPG Distributorships.
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