Core earnings miss due to margins but lower opex, higher Other Income drive reported PAT
* HPCL reported standalone EBITDA/PAT of Rs33bn/Rs23.5bn, down 8%/5% qoq (6%/32% beat). PAT beat was driven by a 51% qoq decline in interest, 75%/94% yoy/qoq jump in Other Income and Rs3bn forex gain. EBITDA was higher due to lower opex.
* Reported GRM stood at USD1.9/bbl in Q3 (vs. USD3/bb est). Core GRM came in at negative USD1/bbl (est. +USD2.0). Marketing inventory gain of Rs7.1bn implies blended marketing margin of Rs5.8/kg, down 2% qoq (6% miss). Domestic sales grew 3% yoy.
* Gross debt fell 4% qoq to Rs333.4bn (up 17% yoy) with Rs27bn of lease liability. 10M capex was Rs88bn (Rs120bn FY21 target), while outstanding subsidy is Rs40bn. Q3 core EPS stood at Rs7.7 (13% miss). HPCL bought back 40.7mn (Rs8.9bn) shares so far.
* We raise FY21E EPS by 12% due to higher marketing volumes, lower interest and higher Other Income. We cut FY22/23E by 10%/7%, assuming lower marketing margins. We roll forward valuations to Mar’23E and raise the TP by 2% to Rs285. Retain Buy and OW.
Highlights: Gross profit was largely in line, while opex was lower (employee cost 11% below est). Domestic sales volumes fared better than the industry/IOCL (1%/2% decline yoy). HPCL’s total volumes declined 2% yoy to 10.4mmt. Petrol/diesel volumes grew 6.6%/1.3% yoy vs. industry rise of 6%/fall by 1%. Pipeline volumes were up 17% qoq to 5.5mmt (up 8% yoy), while refinery utilization was 101% or 4mmt. Share of profits from associates/JVs fell to Rs569mn in Q3 from Rs6.1bn/Rs1.7bn in Q2FY21/Q3FY20. As of Q3, HPCL has bought back 1.65% of shares outstanding. Mumbai refinery will see shutdown in Q1FY22 for expansion completion. HPCL is open to Iranian crude if western sanctions end under new US president.
Guidance: Demand pick-up should continue in Q4 with likely growth of 4-5% yoy (ending FY21 at 92-93% yoy). Diesel is expected to rebound ahead. Lube and direct sales have important contribution to profitability with EBITDA contribution from lubes at 10-15%. There has been opex savings relating to new pipelines and lower admin costs. The commissioning of Mumbai refinery expansion is expected in Q1FY22, while Vizag in Q3FY22 with bottoms upgrade in Q1FY23. Barmer (RJ) refinery would be commissioned in CY23 and would have one of the best GRMs at double digits. HPCL will become a major petchem player at 4- 5mmtpa volumes post HMEL and RJ. It has 3,700kms of pipeline network and another 1,600kms under development. The same is used as captive also and is strategic. Replacement cost currently is Rs40-80mn/km. HPCL will look into the Budget announcement on monetization and it is too early now. It would have to evaluate it, incl. taxation angle etc. FY22 capex would be Rs140bn − Rs50bn/Rs55bn/Rs20bn on marketing/refining R&D/CGD.
Valuation: We value HPCL on SoTP basis with core business using EV/EBITDA (6.3x). Key risks are adverse petroleum prices/margins/currency/policy actions and project over-runs.
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