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In-line EBITDA; weaker core GRM due to expansion pre-commissioning

* HPCL reported Q4FY22 standalone EBITDA/PAT of Rs21.9bn/Rs18.0bn. EBITDA was a slight 2% beat, though RPAT came in 171% above our estimate on a 2.5x higher Other Income at Rs16bn, which included PMUY loss reversal and interest unwinding (Rs6bn).

* Reported/core GRM came in lower at USD12.4/USD6.4 per barrel (vs USD14.8/7.8 est.). Refinery volume was also a 4% miss at 4.69mmt. Pipeline volumes fell 3% qoq to 5.3mmt. Domestic sales volume growth of 4% yoy was better than the industry/IOCL/estimates.

* Assuming marketing inventory gain (undisclosed) of Rs20bn, we estimate HPCL’s blended margin fared better than expected at Rs1.8/kg (Rs0.5/kg est). Gross debt (ex-lease liabilities) rose 8% yoy/16% qoq to Rs431.9bn, with interest costs up 39% qoq to Rs3.3bn.

* We cut our FY23E EPS by 31%, lowering marketing margins ahead, though partly offset by higher GRMs. We reduce our Mar’23E SOTP-based TP by 11% to Rs295, lowering the core business blended FY24E EV/EBITDA multiple to 5.4x from 5.7x. Maintain Buy

Highlights: HPCL’s gross profit of Rs74.3bn in Q4 was 11% above est, though opex rose 5% yoy/28% qoq to Rs52.5bn (staff and other expenses were 14-15% above est each). Depreciation rose 6% qoq. The forex loss was less at Rs872mn, while the tax rate was 21.4% due to provision reversal. Petrol/diesel sales volume growth was 1%/flat yoy, in line with industry numbers. The share of profit from assoc/JV was slightly down qoq at Rs5.62bn. For FY22, S/A EBITDA/APAT was Rs102bn/Rs59bn, down 35%/44% yoy on the back of an over 30% drop in marketing margins. Reported GRM rose from USD3.9/bbl to USD7.2/bbl. Refining throughput fell 15% to 14mmt due to expansion-based shutdowns, while marketing volumes rose 7% to 39.1mmt. Capex, as per PPAC data, was Rs162bn. The board declared a dividend of Rs14/sh (Rs22.8/sh in FY21), flat yoy payout at 31%.

Guidance: HPCL plans to shut a smaller Mumbai Refinery CDU in Q3FY23 and a Vizag CDU in Q4FY23. The Vizag expansion project is at the mechanical completion stage. It has also won an Indian Air Force tender for the supply of ATF at 5 locations for 5 years. Russian crude is being procured at discounted rates, with plans to buy more. The govt is looking for a term deal with Russia and HPCL is interested in the deal. Management stated the marketing segment saw weakness due to controlled pricing, but it is looking at passing on the increased cost and will take an integrated view wrt GRMs. GRMs are currently highly volatile. HPCL expects crude to remain above USD100/bbl for the year.

Valuation: We value HPCL on a SOTP basis with investments at a 30% holdco discount. HPCL’s expansion pre-commissioning have been a drag on refining earnings, though post the recent stock correction, valuations are attractive, and hence we maintain Buy. Key risks: adverse commodity/currency/polices and project issues

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