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Marketing business drives earnings
HPCL reported an in-line revenue/gross profit in Q3. However, EBITDA/PAT were below our estimates by 18.2/26.1% owing to higher operating expenses. We maintain BUY given the impending 55% increase in refining capacity and stable marketing margins.
HIGHLIGHTS OF THE QUARTER
* HPCL’s 3QFY20 EBITDA came in at Rs 18.67bn (-19.5% QoQ) owing to 8.8% QoQ fall in refining throughput to 4.2mmt, 13.1% QoQ fall in gross marketing margin to Rs 3.8/ltr and 36.7% QoQ decline in reported GRM to USD 1.79/bbl. Core EBITDA (excl inventory gains and forex losses) was down 39.6% QoQ to Rs 14.42bn.
* Refining: Refinery throughput was 4.16mmt (-8.8% YoY/QoQ). Utilisation stood at 112/98.7% for the Mumbai/Visakh refineries. Core GRM (excluding inventory gains of USD 0.33/bbl) stood at USD 1.46/bbl vs USD 2.56/10.0 in 2QFY20/3QFY19. GRMs were impacted owing to higher fuel and losses (8.8% vs 8.6% for FY19).
* IMO has failed to boost middle distillate, particularly diesel, cracks. Diesel cracks are at a 10-quarter low of USD 12/bbl in Q4FY20 as demand from ships to comply with IMO’s sulphur regulation has disappointed. Hence, we cut our core GRM estimates for FY20/21/22E to USD 3.1/3.3/3.7/bbl from USD 4.0/4.2/4.5/bbl to factor-in 9MFY20 trends and gloomy outlook on global petroleum product demand. Thus, our EPS estimates fall by 14.0/13.3/13.8% to Rs 25.0/29.0/30.9 in FY20/21/22E (vs consensus of Rs 34.3/40.7/41.2).
* Marketing: Domestic marketing sales volumes were 10.6mmt, up 8.6/12.6% YoY while India’s petroleum product consumption rose by 2.6/7.7% YoY/QoQ. Thus demonstrating that HPCL gained massive market share. Blended gross margin stood at Rs 3.8/lit (+5.1/-13.1% YoY/QoQ). These margins seem sustainable.
* Key monitorable: Middle distillate cracks.
HPCL is doubling its existing capacity at Visakh from 8.3mmtpa to 15mmtpa by FY21E (outlay Rs. 210bn) and increasing it from the current 7.5mmtpa to 9.5mmtpa (outlay Rs 50bn) at Mumbai. This will drive the earnings for its refinery business. We remain constructive on HPCL in a falling crude price scenario as it will (1) Reduce Govt’s intervention in auto fuel pricing, (2) Reduce working capital, (3) Put subsidy burden overhang to rest. Our SOTP target is Rs 315 (6x Dec 21E EV/e for standalone refining and pipeline, 7x EV/e for marketing and Rs 51/sh from other investments) vs the consensus TP of Rs 340/sh.
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