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QoQ improvement in margins drive earnings

Our view

HPCL reported 2QFY22 in‐line with our and street estimates with operating profits at Rs 30.1bn (‐16% YoY; ‐6% QoQ). During the quarter, HPCL’s operating profits were impacted by reduced refinery utilization and higher operating costs due to ongoing maintenance and expansion. HPCL has added two new units and revamped six units at its Mumbai refinery (MR), which are under stabilization; the throughput at MR is expected to reach full capacity in 4QFY22. Similarly, the expansion of Vizag refinery (VR) to 15mmt (from 8.3mmt) is expected to complete in FY22, with ramp‐up in FY23. After the proposed expansion HPCL has at present no plans to invest in incremental refining capacity and plans to add renewable capacity in green hydrogen going ahead. In our view, with maintenance/expansion of MR now complete, and that at VR expected to reach conclusion the earnings are going to improve over 2HFY23 and FY23, more so as refinery margin environment remains strong. Maintain BUY with a TP of Rs 410/sh.  

Result Highlights

* 1QFY22 Profitability:  The Ebitda and PAT for the quarter stood at Rs 30.1bn (‐ 16% YoY;  ‐6% QoQ) and Rs 19.2bn (‐22% YoY; +7% QoQ). Operating profits impacted by comparatively weaker (compared to peers) GRMs and lower refinery utilization.

* Refinery Utilization: The refining throughput stood flat   QoQ at 2.53mmt (1Q: 2.5mmt), with refinery utilization at 64% (1Q: 63%), as throughput was restricted on account of maintenance in both MR & VR. The throughout at MR (MR) stood at 1.03mmt (55% utilization) and at VR at 1.51mmt (73% utilization). Through at MR expected to improve over 2HFY22 as new/revamped units stabilize. VR expansion to complete in FY22 and ramp‐up is expected over FY23.   

* Gross Refinery Margin: The GRMs stood QoQ weaker at USD 2.44/bbl, despite sequential improvement in refinery margin environment, on account of low utilization and higher fuel/operating costs per barrel, offsetting stronger cracks.

* Marketing sales: Total Domestic products sales stood at 9.1mmt (+8% YoY; +3% QoQ), vs industry growth of 6.4% YoY during the quarter. MS sales reported a growth of 13% YoY (industry: 11.7% YoY) and HSD sales growth of 9% YoY (industry: 8.8% YoY), with market share gains across MS and HSD in the 2Q.  

* Marketing margins: As per our assessment, the marketing margin during the quarter stood at Rs 5700/t (1Q: Rs 5065/t), primarily on QoQ improvement in  MS and firm HSD margins. HPCL has discontinued disclosure of marketing inventory gains, so accurate assessment of gross margins to that extent is challenging.

Valuation

AT CMP HPCL is trading at a P/E of 5.4x FY24e, vs 7.4x FY24e, implied by our target price. We value HPCL at Rs 410/sh, on SOTP basis, with an equity value of Rs 351/sh for the standalone business, Rs 51/sh for investment in HMEL Refinery and Rs 9/sh for other investment.

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