HPCL reported a significant EBITDA beat on much higher inventory gains in refining and marketing than we expected. Marketing volume growth was sharply ahead of industry growth. Marketing profitability is likely to be restored as crude cools and retail price hikes continue. Despite a 3.2x y/y jump in OCF, borrowings were flat due to a large increase in inventories and back-ended capex. We cut earnings 3%/5% for FY22/23E on ongoing restrictions, maintain Buy.
Results well ahead of our expectations: Reported EBITDA was 101% ahead of JEFe driven by inventory gain in refining. Reported PAT was 145% ahead of JEFe.
Core refining ahead: Core GRM of US$3.5 was ahead of JEFe (US$1.8). Inventory gain of US$4.6 was much higher than JEFe (US$ 2.1). Refinery throughput declined 5% y/y in FY21.
Marketing aided by inventory gains: Marketing EBITDA was aided by inventory gains of Rs 29.5bn. Marketing volume +6.3% y/y against +2.5% for industry. Gasoline and diesel market shares were flat and +40bps y/y. Core marketing profitability was lower than our estimate on sharp increase in cost.
SGP GRM outlook mixed: Trafigura, in its recent Jef U interaction, indicated it expects gasoline spreads to strengthen further on higher than normal demand during the US driving season in June-July. Naphtha should also remain strong on downstream demand. But the outlook on diesel is mixed with continued restrictions in India and weakness in global aviation fuel demand. Diesel is 45% of HPCL’s product slate.
Retail price revisions have some way to go: Retail prices of gasoline and diesel have increased by Rs 2.4-2.8/lt since the elections ended. At the current crude price, our calculations suggest further retail price hikes in the range of `0.8-4.6/lt in diesel and gasoline respectively are needed to restore normal margins.
Healthy dividend, maintain Buy: We have cut marketing volumes by 6% for FY22/23E to factor in the Covid-related restrictions. We have cut FY22/23E EPS by 3%/5% on the back of the volume cuts. The company announced a dividend of Rs 22.75/share (8.5% yield). HPCL trades at a wider 60% discount to BPCL on fwd book value compared to the historical average of 35%.
Maintain Buy on HPCL with an unchanged Rs 370 PT. We continue to prefer HPCL over BPCL on favorable valuation.