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1Q muted but prognosis stronger

Result Highlights:

* 1QFY22 Profitability:  EBITDA & PAT at Rs 31.9bn(‐27% YoY; ‐32% QoQ) & INR 17.9bn (‐36% YoY ;  ‐40% QoQ). Profitability during the quarter impacted by a) lower refining throughput on account of planned shutdown at Mumbai refinery and unplanned outage at Vizag refinery and b) Covid 2nd wave impact on petroleum sales.

* Refinery Utilization: The refinery throughput and utilization stood sequentially lower at 2.5mmt and 63% (4QFY21: 4.4mmt & 111%) on account of planned maintenance shutdown of 45 days in Mumbai refinery, in order to undertake expansion to 9.5mmt (from 7.5mmt), the expanded capacity in refinery is under‐ going precommissioning trial and would commission around 20th Aug.  

* Gross Refinery Margin: The GRM during the quarter stood at USD 3.3/bbl,  below our estimates. Refinery operating costs per unit also possibly increased due to lower through put and outage.  

* Marketing sales: Total Domestic  products sales stood at 8.8mmt  (+16% YoY; ‐ 13% QoQ), vs industry growth of 19% YoY during the quarter. MS sales reported a growth of 37% YoY (industry: 35% YoY) and HSD sales growth of 22% YoY (industry: 22% YoY). The MS and HSD sales however declined by 14% and 11% QoQ, respectively, with likelihood of marginal loss of market share on sequential basis. The sharpest drop was seen in lubricant sales which dropped by 45% YoY and 65% QoQ, to 0.06mmt on account of Mumbai refinery outage

* Marketing margins: As per our assessment, the marketing margin during the quarter stood at Rs 5065/t (4Q: Rs 4528/t), primarily on healthy HSD spreads, even as    muted MS margins and sharp decline in lubricant sale (high margin product) would have likely weighed on marketing margins. No estimate of marketing inventory gain was disclosed during 1Q, but as per our estimates, given the movement in retail product prices an eventory gain of Rs 15‐20bn is likely.

View & Valuation

The 1QFY22 earnings stood below our estimates but above street estimates. The miss on our estimates stemmed primarily from lower than estimated a) HSD and lubricant sales; b) lower inventory gains and c) weaker refining through put and margins.

With a weak 1QFY22, now behind us we expect HPCL’s earnings to gain traction and improve going ahead on a) commissioning of expanded capacity at Mumbai refinery, which will increase annual throughput by 2mmt and at the same time would also entail process efficiency gains,  b) commissioning of expanded capacity at Vizag refinery (from 8.5 to 15mmt) along with commissioning of hydrocracker and bottom upgradation unit by the end of CY22, which shall help boost throughput & margins and c) improvement in petroleum sales as economic growth returns to normalcy. In addition, we have also noticed improvement in MS marketing margins over Jul’21 (vs 1QFY21) even as HSD margins stay firm, thereby indicating better marketing profitability as well. We maintain our BUY rating on HPCL with a Mar’23 TP of Rs 410/sh.  

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