Hindustan Petroleum Corporation - Q1 up sharply driven by marketing margin jump - ICICI Securities

Hindustan Petroleum Corporation's (HPCL) consolidated and standalone EPS was up 157-247% YoY on record net marketing margin, product inventory gain and tax fall, despite fall in sales volume due to the lockdown hitting demand. HPCL's GRM disappointed. Cheap crude bought in Q1 may lead to inventory gain and boost HPCL's GRM in Q2. Weakness in core GRM is a concern, but that including inventory gain is likely to be in-line with our FY21 estimates. Auto fuel marketing margin appears to be on track to meet or exceed our FY21 estimates. HPCL outperformed peers with its throughput rising by 1% YoY (25-32% YoY fall for peers) and utilisation at 101% (74% for peers) in Q1. HPCL is likely to outperform peers even in Q2 on utilisation. We reiterate BUY on HPCL.

- Q1FY21 EPS up 157%-247% YoY on marketing margin rise: HPCL's standalone Q1FY21 EPS was up 247% YoY driven by record net marketing margin of Rs6.13/l (up 3.3x YoY), product inventory gain of Rs4.3bn (vs loss of Rs200mn in Q1FY20) and decline in tax rate to 25% from 35% in Q1FY20. Steep rise in Q1 profit was despite 95% YoY plunge in reported GRM to US$0.04/bbl (core GRM at minus US$0.9/bbl) and 26% YoY fall in sales volumes to 7.24mmt due to the lockdown. Q1 consolidated EPS rise was less steep than standalone EPS rise at 157% YoY due to share of loss of JVs and associates of Rs5.6bn vs profit of Rs1bn in Q1FY20.

- Q2FY21E earnings outlook good: Auto fuel net marketing margin is healthy at Rs2/l in Q1FY21-TD. HPCL's core GRM in Jul'20 is estimated at US$2.9/bbl (vs Q2FY20 reported GRM of US$2.8/bbl). GRM including crude inventory gain would depend on the cost of opening crude inventory. It appears the cost of HPCL's crude inventory in Jun'20 may be low due to low cost crude bought in Q1. HPCL's product inventory gain is estimated at Rs5.4bn in Q2FY20-TD vs loss of Rs130m in Q2FY20.

- HPCL outperformed peers on utilisation in Q1; same likely in Q2: HPCL's refinery utilisation was 101% in Q1FY21 vs 74% for OMC peers. Its Q1 throughput was up 1% YoY while that of peers was down 25-32% YoY. BPCL and IOC cut throughput MoM and shutdown refineries for maintenance in Jul-Aug'20 as diesel demand recovery reversed in Jul'20. HPCL is likely to operate even in Q2 at 100% utilisation and outperform peers. HPCL's higher refinery utilisation than peers is because it outsources ~60% of its auto fuel sales volume vs 15-30% by peers.

- HPCL is our top pick among OMCs: Auto fuel net marketing margin is at Rs4.92/l in FY21-TD and at Rs2/l now, which suggests it is on track to be either in-line with or higher than our estimates of Rs2.5/l in FY21. Downside to FY21E core GRM of US$4.3/bbl is possible, but that including inventory gain is likely to be in-line with our estimates. HPCL's likely higher refinery utilisation than peers in FY21E, bigger gains than peers from expected strong auto fuel marketing margins and being less impacted if GRMs disappoint, make it our top pick among OMCs.

Shares of HINDUSTAN PETROLEUM CORPORATION LTD. was last trading in BSE at Rs.213.55 as compared to the previous close of Rs. 216.2. The total number of shares traded during the day was 952998 in over 11666 trades.

The stock hit an intraday high of Rs. 224.9 and intraday low of 212.45. The net turnover during the day was Rs. 205385622.

Source : Equity Bulls

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