HPCL's Q4FY18 results (Outperformer) - A Strong year, but margins the big worry for FY19
Q4FY18 highlights
- Reported EBITDA/PAT of Rs29bn/Rs17.5bn for the Qtr, a modest 1% yoy rise in EBITDA and a 4% yoy decline in PAT (IDFCe EBITDA/PAT of Rs33bn/Rs18.7bn).
- Refining thruput of 4.63mt (119% utilization) with FY18 thruput of 18.3mt implying 115.7% utilization for the year. Reported GRMs of $7.1/bbl (IDFCe $7.7/bbl) with inventory gains of $0.5/bbl vs a loss of $0.5/bbl in Q4FY17 (IDFCe $1.1/bbl).
- Marketing volumes of 9.45mt grew 6.7%, well ahead of estimates of 9.2mt. FY18 volumes of 36.9mt have grown 4.6%, 160bps higher than 3% growth seen in FY17
- Marketing margins have jumped sharply to an 8 qtr high of Rs5430/t, driven by a sharp recovery across product margins. FY18 blended margins of Rs4584/t have improved Rs377/t yoy.
Key positives: US$0.6/bbl qoq improvement in core margins, 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 reduced FY19/20E EPS by 18/14% to factor sharply lower retail fuel margins. TP reduced to Rs440/sh.
Valuations & View
Despite the miss on earnings, we are enthused by the operational performance for the qtr/year, with core GRMs meeting estimates and 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 sustaining at >US$7.5/bbl over FY18-20E, 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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