MOSL: HPCL (Buy)-Adj. EBITDA exceeds estimate led by strong core GRM of USD8.8/bbl

​HPCL: Adj. EBITDA exceeds estimate led by strong core GRM of USD8.8/bbl

(HPCL IN, Mkt Cap USD10.3b, CMP INR432, TP INR510, 18% Upside, Buy)

• HPCL’s EBITDA, excluding INR16b of inventory losses, increased 49% YoY (+14% QoQ) to INR32b, significantly ahead of our estimate of INR20b, primarily due to higher-than-expected core GRM. Inventory loss included INR6.3b in refining and INR9.6b in marketing. Reported PAT of INR9.3b came in above our estimate of INR8.7b (-56% YoY, -49% QoQ), as other income increased 150% YoY (+27% QoQ) to INR6.5b (est. of INR3.5b), led by forex gain of INR1.1b, as against loss of INR890m in 1QFY17.
• HPCL reported GRM of USD5.9/bbl (est. of USD4.9), lower than USD8.0/bbl in 4QFY17 and USD6.8/bbl in 1QFY17, due to inventory loss of USD2.96/bbl. Core GRM stood at USD8.8/bbl, as against USD8.5/bbl in 4QFY17 and USD4.8/bbl in 1QFY17.
• Refining throughout stood at 4.5mmt (flat YoY, +3% QoQ). While product sales grew 4% YoY (+5% QoQ) to 9.3mmt in 1QFY18, implied marketing gross margin shrunk 32% YoY (-21% QoQ) to INR3.2/liter.
• Raising estimates: Over the last six months, HPCL has been reporting impressive refining margins. Although in the longer run, refining margins would be adversely affected by refining glut, the short-term trend paints a different picture. Due to increased unplanned shutdowns, the refining margin in 2QFY17 YTD has also been strong at USD7.4/bbl. Historically, we have been valuing HPCL’s refining assets at ~10% discount to IOCL and BPCL. Due to the recent improvement in its refining performance, we raise our refining multiple to 5.5x from 5x earlier. We also raise our GRM assumptions for FY18/19 to USD6.5/6.1/bbl from ~USD5/bbl earlier. This results in an increase in our earnings estimate by 16%/12% for FY18/19.