HPCL's Q3FY19 results (Neutral) - Inventory losses impact earnings
Q3FY19 highlights
- HPCL’s adjusted EBITDA/PAT of Rs9.6bn/Rs2.5bn declined sharply by 55%/77% qoq and was well below IDFCe of Rs18.1bn/7.8bn, driven by lower thruput and heavy inventory losses. 9MFY19 EBITDA/PAT of Rs62.7bn/Rs30.6bn was lower vs 9MFY18 EBITDA/PAT of Rs77.2bn/Rs46.1bn.
- Refining thruput of 4.56mt was flat yoy, -4% yoy (IDFCe 4.7mt), while GRMs of US$3.7/bbl (Core US$10/bbl, highest in 11 qtrs. Inventory loss of US$6.3/bbl) were US$5.3/bbl lower yoy. IDFCe was at US$3/bbl with core GRM of US$4.2/bbl (inventory loss of US$1.2/bbl). 9MFY19 GRMs were at US$5.1/bbl vs 9MFY18 GRMs US$7.5/bbl.
- Marketing volumes of 9.7mt was in line, growing by 3% yoy and 7% qoq indicating a gain in market share. Blended marketing margins of Rs4700/t were flat qoq – despite an improvement in retail fuel margins suggesting more moderate other product margins in Q3. Inventory losses of Rs19.3bn in marketing were also well ahead of Rs3bn estimated.
- Debt of Rs206.2bn, up Rs27.7bn qoq. Depreciation/interest costs of Rs7.4/1.5bn broadly in line with estimates and 9/64% higher yoy respectively
Key positives: Improvement in market share
Key Negatives: Weak refining metrics, other retail products margins moderate, higher interest costs.
Impact on financials: We revise our GRM assumption over FY19E-FY20E resulting in 22/5% cut in FY19/20E EPS. TP revised to Rs250/sh.
Valuations & View
A weak quarter operationally, impacted by higher inventory losses. Despite marketing margins on retail petrol/diesel remaining high, blended marketing margins remained flat qoq due to moderate marketing margins on other products. We believe near term operational scenario remains muted with weakness in GRMs to persist and high capex to increase leverage for HPCL. IMO regulations may provide a boost to GRMs over FY21E but in the near term earnings visibility is poor, exacerbated by the upcoming elections. Valuation multiples of 5.6x FY21E EPS and 1x Book value are not expensive, but we believe the weakness in refining margin environment and lack of clarity on fuel margins merits caution. Reiterate Neutral with a TP of Rs 250/sh (11% 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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