Key takeaway: HPCL reported a 9% EBITDA beat. Operating outcomes had been weak with a massive miss in refining and marketing and advertising boosted by inventory gains. Fire-impacted CDU in Vizag hurt refinery throughput (will effect 2QFY22 also). With OMCs holding auto fuel costs steady amid weakness in Brent, HPCL’s marketing and advertising leverage is coming into play. We raise FY22E earnings by 3% on larger inventory gains leaving FY23E broadly unchanged, keep ‘buy’ on favorable valuation.
Ahead of est: Reported EBITDA was 9% ahead of JEFe regardless of a massive miss in refining as marketing and advertising inventory gains came substantially ahead of JEFe (organization didn’t disclose the gains separately). Reported PAT was 3% ahead of JEFe on reduce net interest revenue.
Refining disappoints: Reported GRM of $3.3 came nicely quick of JEFe ($ 5.8). Core GRM would have been weak as distillate yield fell 10% q-o-q. Company didn’t disclose segmental Ebitda or inventory gains separately. Refinery throughput declined 37% y/y to 2.5 mmt on fire-connected closure of one of the CDUs at the Vizag refinery and came in reduce than JEFe (2.9mmt). The CDU will commence mid-August impacting 2QFY22 as nicely.
Marketing aided by inventory gains: Marketing volumes declined 14% q-o-q. We reckon marketing and advertising accounted for most of the reported Ebitda in 1Q as refining was pretty weak. Marketing volumes +16.8% y/y against +18.6% for the sector resulted in 30bps industry share loss in gasoline and just about flat industry share in diesel q/q.
Sgp GRM outlook mixed: Trafigura, in its current Jef U interaction, indicated it expects gasoline spreads to strengthen additional on larger-than-standard demand throughout the US driving season in June-July. Naphtha need to also stay powerful on downstream demand. But the outlook on diesel is mixed with India demand nevertheless down 10% y/y and weakness in worldwide aviation fuel demand (-40% y/y). We anticipate refining margins to go back to their previous cycle typical in 1HCY22.
Better-than-normative marketing and advertising margin at present crude value: Retail costs of gasoline and diesel have enhanced by Rs 9-11/lt considering that the elections ended. OMCs have not decreased retail value even as crude has come off 8% from its current peak. At the present crude value ($71/bbl), our calculations recommend diesel margins at Rs 4/lt and gasoline margin at Rs 2.5/lt. HPCL has the highest leverage to rising marketing and advertising margin on auto fuels.
Maintain ‘Buy’ on favourable valuation: HPCL trades at 1 s.d. beneath historical typical on P/B and close to the typical EV/Ebitda various of the last refining cycle. With OMCs holding retail value of auto fuels steady amid weakness in crude, HPCL’s marketing and advertising Ebitda will obtain a increase. However, a sustained recovery in GRM to previous cycle typical is necessary for out-perf. Maintain ‘buy’ on HPCL with an unchanged value target of Rs 370.