HPCL's Q3FY18 results (Outperformer) - Inventory gains more than offset muted margins
Q3FY18 highlights
- Adjusted PAT of Rs19.5bn (IDFCe Rs14.8bn) improved 23% yoy, helped by inventory gain of US$3/bbl in refining (Rs6.4bn) and Rs.8.4bn in marketing. EBITDA of Rs31.6bn (+13% yoy, IDFCe Rs26.3bn).
- Excluding inventory impact, core refining metrics were relatively weak, with a US$6.1/bbl core GRM, implying a miss of US$1.1/bbl to Singapore benchmarks. Marketing volume growth of 2.2% in domestic volumes (1.7% overall) was below industry growth of 5.9% but we note growth in petrol (5%) and diesel (2%) was marginally above BPCL and well above IOCL growth rate.
- Marketing margins of 3715/ton, down 7/14% yoy/qoq, driven by a decline in gross margins for petrol/diesel. However Jan 2018 average margins for petrol/diesel at Rs2.8/2.9 respectively.
- Refining thruput of 4.52mt implies utilisation of 113%, with a distillate yield of 74.5% and a sulphur crude % of ~58%. Continuing technical issues at Mumbai have caused the miss vs estimates on thruput/core GRMs.
Key positives: US$0.5/bbl improvement qoq in core GRMs, utilisation >110% despite technical issues at Mumbai.
Key negatives: Marketing earnings and volumes weak for the quarter
Impact on financials: FY18/19/20E EPS raised 10/9.6/2.3% to factor inventory gains in FY18, higher marketing margins and marginally higher GRMs, TP unchanged at Rs515 .
Valuations & View
The miss on 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 resolve over FY19E and improving distillate yields, higher high sulfur crude and improving configuration should lead to GRMs sustaining at >US$7.5/bbl over FY18-20E, With a steady recovery already underway in marketing volumes and the recovery seen in petrol/diesel margins in Q4, 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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