Muted performance but better times ahead
* Inventory loss drags core operating performance.
* Core profitability for Q2 is likely to be strong led by recovery in GRMs and healthy marketing margins.
* Benign crude oil price and lack of stake sale overhang is positive for HPCL.
We tweak our earnings to factor changes in forex rate (USD/INR at Rs70/72.1 for FY20/21) and other minor changes post Annual report updation. During Q1, core performance for HPCL was hit by inventory loss and lower than expected GRMs. However, benign crude prices and recovery in refining margins is positive for the OMCs and hence we expect a much better Q2FY20. State PSUs are also likely to benefit from implementation of IMO2020 effective January given >40% diesel slate. Maintain BUY with a revised PT of Rs354 (Rs326) based on 10x FY21E.
* Weak results: HPCL reported lower than expected Q1FY20 results with EBITDA of Rs16.4bn (-48%YoY, -68%QoQ; PLe Rs26.1bn) and PAT of Rs8.1bn (-53%YoY, -73%QoQ; PLe Rs13.1bn) led by lower than expected refining earnings. For Q1, total inventory loss was at Rs5.4bn (PLe Rs4.8bn loss). Foreign exchange gains for Q1 were at Rs1.9bn. In our view, core EBIDTA for the quarter, adjusted for inventory loss was at Rs21.7bn (Rs49.6bn in Q4).
* Core refining margins in-line with benchmark: HPCL’s refining margins for Q1FY20 came in at US$0.75/bbl (Q4FY19 at US$4.51/bbl) and included inventory loss of Rs5.2bn or US$2.6/bbl. Accordingly, core GRMs were in-line with benchmark Singapore refining margins of US$3.5/bbl.
* Global GRM’s are likely to remain under pressure, as new refining capacity addition of ~ 2mbpd is higher than demand expectation of 1.1mbpd. However, OMCs with ~40% diesel product slate remain well placed to benefit from IMO2020 regulation which will increase diesel demand by >1mbpd if implemented immediately. For Q1, refining throughput was at 3.92MTPA due to maintenance shutdown (4.6MTPA in Q4).
* Adjusted marketing profitability were down sequentially: HPCL’s reported Q1FY20 marketing EBIDTA was at Rs20.3bn against Rs52.3bn in Q4FY19 due to inventory loss of Rs200mn. Adjusted marketing EBIDTA was at Rs20.5bn (Rs48.8bn in Q4) due to Central elections. HPCL’s marketing volumes lagged industry run rate for HSD (1.7% YoY vs 2.1% for industry), and MS (8.6% YoY against industry rate of 9.9%YoY) respectively.
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