Maintain ADD on Hindustan Petroleum Corporation - High marketing margins lead the way - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

We maintain ADD on Hindustan Petroleum (HPCL) with a price target of INR 228, owing to an expected recovery in demand for petroleum products and, subsequently, refining margins. 1Q EBITDA and APAT were 3% and 9% above estimates owing to higher-than-anticipated other income. EBITDA came to INR 44bn (vs. EBITDA of INR 16bn in 1QFY20 and an operating loss of INR 17bn in 4QFY20). Refining business' inventory gains were INR 2bn, and marketing inventory gains were INR 4bn. Forex gains stood at INR 490mn. Adjusting for these, core EBITDA stood at INR 37bn (+85/9% YoY/QoQ).

Refining: Crude throughput in 1Q stood at 4.0mmt (+1/-13% YoY and QoQ). Lower utilisation at the Mumbai refinery amid the lockdown led to lower throughput. Core GRM stood at USD (0.8)/bbl vs. USD 3.3/9.3 in 1QFY20/4QFY20. GRMs declined sequentially with fall in naphtha, gas oil, gasoline and jet kero cracks. We expect crude throughput of 15.5/24.0mmt and core GRM of USD 3.5/4.0 per bbl in FY21/22E.

Marketing: Domestic marketing sales volume was 7.6mmt (-25/-20% YoY/QoQ). India's petroleum product consumption contracted by 26/23% YoY/QoQ, thus demonstrating that HPCL gained market share both on an annual and sequential basis. Blended gross margin stood at INR 7.5/lit (+96/80% YoY/QoQ), but these do not seem sustainable in the near term. We expect blended gross margins to correct to INR ~4.5 per litre in FY21/22E.

Standalone debt: Gross debt declined 15% sequentially and jumped 79% YoY to INR 367bn as on Jun 2020. A higher debt was taken as on Mar 2020, considering the liquidity needs amid low demand for petroleum products in 1QFY21.

Our SOTP target comes to INR 228/sh (5.0x Mar-22E EV/e for standalone refining, marketing and petchem businesses and 5.5x Mar-22E EV/e for pipeline business and INR 35/sh for other investments). The stock is currently trading at 5.0x on FY22E EPS.

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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