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GRM recovery key to outlook

Hindustan Petroleum Corporation’s (HPCL) Q1FY22 standalone EPS is down 33% YoY as hit from YoY plunge in net marketing margin exceeded gains from YoY rise in core GRM and crude and product inventory gain. Q1 consolidated EPS was down just 7% YoY due to associates/JVs being in the black vs in the red in Q1FY21.

Hefty hike in domestic prices and fall in international prices from peak has meant auto fuel net marketing margin is on track to be in line with our FY22E estimate of Rs2.5/l or even higher. HPCL’s core GRM is weak in FY22-TD and recovery in diesel cracks is key to GRM rising to our FY22E estimate of US$3/bbl. Lower diesel sales volume to factor-in the impact of second wave and higher debt led to cut in our FY22E-FY23E EPS and target price by 4-8%. Maintain HOLD.

* Q1 standalone and consolidated EPS down 33-7% YoY hit by plunge in net marketing margin: Standalone Q1FY22 profit and EPS are down 36-33% YoY respectively hit by 77% YoY fall in net marketing margin to Rs1.4/l and marketing EBITDA by 65% YoY. Hit from marketing margin fall exceeded gains from rise in estimated core GRM to US$1.0/bbl vs minus US$0.87/bbl in Q1FY21 and 2.9x YoY jump in estimated crude and product inventory gain to Rs18.1bn. Excluding inventory gain/loss, Q1 standalone EPS is estimated to be down 80% YoY. Fall in consolidated Q1 profit and EPS was less steep than standalone at 11-7% YoY due to share of profit from JV/associates at Rs3bn vs loss of Rs5.6bn in Q1FY21.

* Marketing margins appear on track to be in line with FY22E estimate or higher: Adequate (Rs9-11.28/l) hike in domestic diesel and petrol prices in FY22-TD and modest fall in international prices from 6-Jul’21 peak has meant that net auto fuel marketing margin is at Rs3.28/l on 5-Aug’21 and Rs2.82/l in Q2FY22-TD vs Rs1.43/l in Q1FY22 and Rs1.83/l in FY22-TD. Net margin is estimated at Rs3.24/l on 16- Aug’21 based on international prices during 1-4 Aug’21 and at Rs3.58/l at latest international prices. If domestic and international prices remain at current levels, FY22E net margin would work out to Rs2.95/l vs our FY22E estimate of Rs2.5/l.

* Q1 core GRM estimated to be 66% below FY22E GRM; diesel cracks rebound key to GRM recovery: HPCL’s Q1FY22 core GRM estimated at US$1.0/bbl is 66% below our FY22E estimate of US$3/bbl. Reuters Singapore GRM is at an 8-quarter high driven by petrol cracks at 7-quarter high in Q2FY22-TD. However, diesel cracks continue to be weak at US$5.2/bbl in FY22-TD and their rebound to pre-covid level of US$11/bbl is key to GRM recovery.

* Cut FY22E-FY23E EPS by 7-4% and target price by 8%; maintain HOLD: We have cut our FY22E-FY23E diesel sales volume to factor-in the impact of second covid wave. It is the main driver of cut in FY22E EPS by 7% and FY23E EPS by 4%. Rise in debt estimate has meant cut in target price based on 6x FY23E EV/EBITDA by 8% to Rs271 (2% upside). Diesel cracks rebound is key to GRM recovery, which we see as being crucial to improve HPCL’s stock performance.

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