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GRM sustaining & expansions stabilising crucial

Hindustan Petroleum Corporation’s (HPCL) Q2FY22 standalone EPS is down 19% YoY hit by YoY plunge in GRM, throughput and product inventory gain. Fall in consolidated EPS was steeper at 32% YoY as share of profit from associates/JVs fell 97% YoY. Singapore GRM surged to a 25-month high of US$7.5/bbl in Oct’21 on fall in Chinese throughput, Asian and US auto fuel inventories and high gas prices boosting oil demand. HPCL’s refinery expansions and upgradation stabilising quickly and GRM recovery sustaining is key to HPCL’s outlook; a cold winter may ensure GRM strength sustains in FY23E, but there are headwinds too. We have raised our: 1) FY22E EPS by 41% mainly on factoring H1 inventory gains, 2) FY23E EPS by 14% on upgrade in GRM to US$4.5/bbl, and 3) FY23E EBITDAbased target price by 14% to Rs310 (2% upside). Maintain HOLD.

* Q2 EPS down 19-32% YoY hit by plunge in GRM, throughput, inventory gain and share of JV/associate profits: Standalone Q2FY22 EPS was down 19% YoY hit by 52% YoY fall in GRM to US$2.4/bbl, 38% YoY fall in crude throughput and estimated 89% YoY fall in product inventory gain; crude throughput and GRM was hit by expansion at Mumbai refinery, which led to rise in fuel and losses and shutdown of one CDU at Vizag refinery due to fire in May’21. Excluding inventory gain/loss, Q2 standalone EPS is estimated to be up 52% YoY. Q2 consolidated EPS fall was steeper at 32% YoY due to 97% YoY fall in share of profit from JV/associates.

* Marketing margins YTD and FY22E at Rs2.5/l: Net auto fuel marketing margin is at Rs2.47/l in FY22-TD vs our FY22E estimate of Rs2.5/l. To keep margins at this level, more price hikes are required, which we believe are likely to be made.

* Recent Singapore GRM surge bodes well for FY22E outlook; cold winter may keep GRM strong in FY23E, but there are headwinds too: Reuters Singapore GRM was at a 25-month high of US$7.5/bbl in Oct’21 driven by transportation fuel cracks at 21-69 month high. HPCL’s GRM lags Singapore GRM partly due to temporary factors. We expect GRM strength to sustain in rest of FY22E. Capacity additions of 1.3m b/d, possible new covid waves and rebound in Chinese and US refinery utilisation are risks to the strength sustaining, but a severe winter that keeps gas prices high and demand recovery can keep GRM strong even in FY23E.

* Raise FY22E-FY23E EPS and target price: We have raised our FY22E sales volume estimate and cut our throughput estimate to factor-in H1 trends and factoredin H1 crude and product inventory gain of Rs19.8bn. The net impact is upgrade in FY22E EPS by 41%. We have raised our FY23E core GRM estimate to US$4.5/bbl from US$4/bbl earlier assuming return to normalcy after completion of expansion in FY22E and partial gains from residue upgradation at Vizag refinery. This has led to upgrade in FY23E EPS by 14%. Target price, based on 6x FY23E EV/EBITDA excluding inventory gains, is up by 14% to Rs310 (2% upside).

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