Maintain ADD on Hindustan Petroleum - Inventory losses dent profitability - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities.

Hindustan Petroleum (Q4FY20): Inventory losses dent profitability. Maintain ADD
(TP Rs 230, CMP Rs 210, MCap Rs 320bn)

We maintain ADD on HPCL with a TP of Rs 230 in a owing to an expected recovery in demand for petroleum products and subsequently, refining margins.

View on the result: In 4Q, the EBITDA loss was lower than our estimates owing to better than estimated core GRM (USD 9.3/bbl vs. est. USD 0.8).

EBITDA: 4QFY20 EBITDA loss came at INR 17bn (est. loss INR 24bn) versus INR 19bn in 3QFY20 and INR 52bn in 4QFY19. Refining business' inventory losses were INR 26bn and marketing inventory losses were INR 16bn. Forex losses were INR 10bn. Adjusting for these, core EBITDA comes to INR 34bn (-15.6/+134.3% YoY/QoQ). For FY20, inventory loss/forex loss came to INR 43/8bn and core EBITDA stood at INR 92bn (-19.3% YoY).

Refining: Crude throughput in 4Q stood at 4.5mmt (-1.3/+9.1% YoY/QoQ). Utilisation at Mumbai/Visakh for 4Q stood at 113/116% and at 108/109% for FY20. Core GRM stood at USD 9.3/bbl vs USD 2.2/1.5 in 4QFY19/3QFY20. GRMs improved with higher naphtha, LPG cracks and fuel oil cracks. For FY20, crude throughput and core GRM stood at 17.2mmt (-6.8% YoY) and USD 4.2/bbl (vs. USD 4.6 in FY19).

Marketing: Domestic marketing sales volume was 9.6mmt (-5.3/-9.5% YoY/QoQ). India's petroleum product consumption contracted by 4.8/3.3% YoY/QoQ, thus demonstrating that HPCL lost market share on both quarterly and annual basis. Blended gross margin stood at INR 4.1/lit (-31.2/+8.2% YoY/QoQ) and seems sustainable in the near term.

Adjustments in 4Q: After tax loss of INR 20bn in 4Q has been adjusted for (1) Inventory loss of INR 10bn, and (2) Deferred tax of INR 21bn. Lower demand for crude oil and petroleum products impacted the prices and in turn refining margins. Due to this, part of HPCL's inventory has been valued at net realizable value/replacement costs resulting in a loss of INR 10.0bn. The company moved to the lower tax regime of 25.2% in the quarter and availed benefit of deferred tax that has been adjusted to arrive at APAT.

Outlook for FY21/22E: Standalone crude/marketing throughput is expected to dip by 9.9/9.3% YoY to 15.5/34.3mmt in FY21 and recover subsequently by 54.8/16.1% in FY22 to 24.0/39.8mmt in FY22. Core GRM should decline by 17.8% YoY in FY21, courtesy lower gasoil and gasoline cracks, to USD 3.5. Thereafter in FY22, recover to USD 4.0/bbl (+14.3% YoY). Gross profits, however, should remain intact at current levels, INR 4.6/4.5 per litre in FY21/22 vs INR 4.5 in FY20.

Change in estimates: We raise our standalone FY21/22 EPS estimate by 20.1/6.4% owing to the change in tax rate to 25.2%. We raise our Core GRM estimates by USD 1.7/0.3 per barrel to USD 3.5/4.0 for FY21/22.

Shares of HINDUSTAN PETROLEUM CORPORATION LTD. was last trading in BSE at Rs.209.9 as compared to the previous close of Rs. 206.45. The total number of shares traded during the day was 432968 in over 5978 trades.

The stock hit an intraday high of Rs. 214.7 and intraday low of 206.4. The net turnover during the day was Rs. 91077233.

Source : Equity Bulls

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