HPCL's Q2FY19 results (Neutral) - Weak refining metrics impact earnings
Q2FY19 highlights
- HPCL reported a 37% decline in PAT for Q2 to Rs10.9bn, with EBITDA of Rs21bn also declining 27%. The reported numbers are below estimates of Rs24.7bn EBITDA/ Rs12.7bn PAT.
- Refining thruput of 4.76mt was up 3% yoy (IDFCe 4.6mt), while GRMs of US$4.8/bbl (Core US$2.7/bbl, lowest in 10 qtrs. Inventory gain of US$2.1/bbl) were US$2.8/bbl lower yoy and below IDFCe $5.7/bbl (Core $4.5/bbl, Inventory gain $1.2/bbl).
- Marketing volumes of 9.1mt, growth of 4.8% yoy (IDFCe 9.1mt). Marketing margins of Rs4735/t, up 10% yoy, ahead of IDFCe Rs4475/t, driven by higher other product margins.
- Marketing inventory gains of Rs7.5bn, 2x yoy, ahead of IDFCe Rs3.3bn.
- Debt of Rs178.5bn, up Rs30bn qoq to factor short term debt increase. Depreciation/interest costs of Rs7.4/2bn broadly in line with estimates and 9/28% higher respectively
Key positives: Steady growth in marketing volumes, strength in marketing margins
Key Negatives: Very weak refining metrics, Retail margins stay subdued, sharply higher depreciation/interest costs
Impact on financials: We reduce GRM/ retail fuel margin assumptions downwards, but the sharply higher inventory gains/higher other product margins still leads to a 10/11% uptick in FY19/20E EPS. TP revised to Rs275/sh.
Valuations & View
Overall a weak quarter operationally, with inventory gains saving some of the blushes for HPCL. Q3 prospects do not look that bright either, with lower marketing margins, lower GRMs and continued increase in debt levels a dampener for HPCL, even as the recent softness in crude prices provides some hope of a recovery in margins. Valuations multiples of 6.9x FY20E EPS and 1.2x Book value are not expensive, but we believe the weakness in refining margin environment and lack of clarity on retail fuel margins merits caution. Reiterate Neutral, despite our target price implying a 20% upside from CMP.
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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