IGI Logo

Rising debt levels a concern; maintain Neutral

* HPCL reported a beat on EBITDA led by better-than-estimated marketing sales volumes (+9% est., at 10.1mmt), refining (at USD8.1/bbl) and marketing margin (at INR6/lit). Marketing volumes de-growth for HPCL was at 6.6% v/s ~9% for the industry in FY21, resulting in a gain in market share.

* Since Apr’21, there is contraction in demand for petroleum products due to localized lockdowns (with petrol/diesel consumption down 30% in May’21 v/s May’19). As per our calculations, gross marketing margin for petrol/ diesel stands at -INR0.3/+INR3/liter currently. Refineries at Visakhapatnam and HMEL are currently operating at 100% utilization, while the Mumbai refinery is undergoing a planned maintenance shutdown owing to ongoing expansion. Factoring the above, we revise down our FY22E EPS by ~20%.

* HPCL expects demand to improve with a rapid pace in vaccinations and the lifting of lockdowns globally, which would improve GRMs. It foresees Brent prices remaining under USD70/bbl (our est. at USD60/bbl for FY22-23E) in the medium term, aiding marketing margin as well.

* The management said expansion of the Mumbai/Visakhapatnam refinery is likely to be completed in 1QFY22/end-of-FY22 respectively, driving refinery throughput growth (of ~5mmt as per our assumptions) in FY23.

* Debt rose 9% YoY to INR419b/INR427b on a standalone/consolidated basis. Capex incurred stood at INR140b in FY21. It guided a capex of INR145b in FY22. With the majority of the capex being back ended for Visakhapatnam and Barmer refinery, the debt burden would increase further.

* HPCL generated a positive FCF of INR62b in FY21 (after a negative FCF of INR110b over FY19-20) owing to best ever profit. However, our estimates suggest negative FCF of INR157b over FY22-23E. Maintain Neutral.

Profit for the year steered by forex gains and inventory gains

* EBITDA came in at INR46.7b (est. INR29.3b). Other expenditure includes INR8.4b toward impairment on re-measurement of PMUY loans. Staff cost declined in 4QFY21 as HPCL utilized provisions made in FY20. It reported forex gains of INR1.4b (est. INR2.5b). PAT stood at INR30.2b (est. INR18.3b).

* In FY21, EBITDA/adj. PAT stood at INR159b/INR107b (v/s INR62b/INR36b in FY20). It reported forex gains of INR10b in FY21 (v/s a loss of INR9b in FY20).

Marketing volumes and margin drive growth in FY21

* Marketing sales volumes came in 9% above our estimate at 10.1mmt (+6% YoY). Refining throughput was in-line at 4.4mmt (-3% YoY) in 4QFY21. In FY21, Refining throughput/marketing sales fell 4%/8% YoY to 16.4/36.6mmt.

* Marketing margin stood at INR6/liter (est. INR5.2, +64% YoY and +15% QoQ) in 4QFY21. It stood higher YoY at INR6.3/liter in FY21 (v/s INR4 in FY20).

* Reported GRM stood at USD8.1/bbl (v/s our est. of USD4.5) in 4QFY21. Reported GRM came in at USD3.9/bbl (v/s USD1 in FY20) against Singapore GRM of USD0.5/bbl in FY21.

* The company added 2,158 new fuel ROs in FY21 (highest ever yearly addition); totaling 18,634 ROs. HPCL plans to add 2,000 fuel ROs in FY22.

Valuation and view

* HPCL announced a final dividend of INR22.75/share, which translates to a dividend yield of 8% in FY21. It also completed its share buyback program on 20th Apr’21 (amounting to INR24b pre-tax).

* Government receivables stands at INR3b (down from INR63b in FY20).

* Completion of various ongoing projects will drive growth over the next 3-4 years. These projects are bottom upgradation unit at Visakhapatnam (3QFY23), HMEL’s petchem project (CY21), Charra LNG terminal (CY22), Rajasthan (Barmer) refinery (CY23), and development of 20 CGD GAs in nine states.

* The company is working on petchem integration projects totaling ~6.2mmt

(~15% of total refining capacity) over the next 3-4 years:

* Additional cracker at HMEL would have a capacity of ~2.7mmt.

* The Rajasthan refinery would have 2.2mmt of petchem capacity.

* (OMPL and MRPL combined should have an additional 1.2-1.4mmt capacity.

Given the company’s potential as highlighted above, and risks such as project execution at Visakhapatnam and rising debt levels, we maintain our Neutral rating. HPCL trades at par with its one-year forward long-term P/BV average. We value it at 1.1x FY23E P/BV to arrive at our TP of INR310/share.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer