HPCL's Q1FY19 results (Outperformer) - Inventory gains offset weak refining
Q1FY19 highlights
- Reported EBITDA/PAT of Rs31.9bn/Rs17.2bn for the Qtr, a sharp 96/86% yoy rise respectively (IDFCe EBITDA/PAT Rs23.3bn/Rs12bn).
- Refining thruput of 4.52mt (115% utilization). Reported GRMs of $7.15/bbl (IDFCe $7/bbl) with inventory gains of $3.4/bbl vs a loss of $2.86/bbl in Q1FY18 (IDFCe $1.2/bbl).
- Marketing volumes of 9.72mt grew 5%, well ahead of estimates of 9.6mt. Strong growth in Petrol (+7%) and LPG (+11%) supported the growth.
- Marketing margins at Rs4622/t down 15/5% yoy/qoq driven by weakness in petrol/diesel, offset somewhat by other product margins.
- Earnings supported by Rs11.3bn inventory gains in marketing vs loss of Rs9.6bn in Q1FY18.
Key positives: Strong marketing segment growth
Key negatives: qoq jump in interest/depreciation costs, sharp dip in retail margins in Q1FY19 due to strong crude prices.
Impact on financials: We have tweaked FY19/20E EPS by 2/14% to factor lower core GRMs, offset by higher marketing margin estimates. TP reduced to Rs416/sh due to lower EV/E multiple ascribed to marketing.
Valuations & View
Despite the miss on core refining, we are encouraged by the operational performance for the quarter, with marketing volumes/margins ahead of estimates by a wide margin. In refining, we believe improving distillate yields, higher high sulfur crude and improving configuration should lead to GRMs gradually improving over FY19-20E, albeit we have moderated assumptions for FY19 to factor the lower core GRMs in Q1. A steady recovery is already underway in marketing volumes, but the biggest joker in the pack remains the trend/expectations for retail fuel margins over FY19-20E. With the uncertainty in the same due to the higher crude prices and multiple rumors on the mechanism to alleviate price burden on customers by the Government, we submit that a reduction in margins below even our conservative estimates of Rs2.5/ltr is probable and presents a material downside risk to our estimates/rating. We note every Rs0.5/ltr reduction in margins for petrol/diesel has a 14% impact on EPS. 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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