Key takeaway: HPCL reported a 9% EBITDA beat. Operating outcomes had been weak with a big miss in refining and advertising and marketing boosted by stock good points. Fire-affected CDU in Vizag harm refinery throughput (will influence 2QFY22 additionally). With OMCs holding auto gasoline costs regular amid weak spot in Brent, HPCL’s advertising and marketing leverage is coming into play. We elevate FY22E earnings by 3% on increased stock good points leaving FY23E broadly unchanged, preserve ‘buy’ on favorable valuation.
Ahead of est: Reported EBITDA was 9% forward of JEFe regardless of a big miss in refining as advertising and marketing stock good points got here considerably forward of JEFe (company didn’t disclose the good points individually). Reported PAT was 3% forward of JEFe on decrease internet curiosity earnings.
Refining disappoints: Reported GRM of $3.3 got here properly brief of JEFe ($ 5.8). Core GRM would have been weak as distillate yield fell 10% q-o-q. Company didn’t disclose segmental Ebitda or stock good points individually. Refinery throughput declined 37% y/y to 2.5 mmt on fire-related closure of one of the CDUs on the Vizag refinery and got here in decrease than JEFe (2.9mmt). The CDU will begin mid-August impacting 2QFY22 as properly.
Marketing aided by stock good points: Marketing volumes declined 14% q-o-q. We reckon advertising and marketing accounted for many of the reported Ebitda in 1Q as refining was pretty weak. Marketing volumes +16.8% y/y in opposition to +18.6% for the business resulted in 30bps market share loss in gasoline and nearly flat market share in diesel q/q.
Sgp GRM outlook blended: Trafigura, in its current Jef U interplay, indicated it expects gasoline spreads to strengthen additional on higher-than-normal demand in the course of the US driving season in June-July. Naphtha must also stay sturdy on downstream demand. But the outlook on diesel is blended with India demand nonetheless down 10% y/y and weak spot in world aviation gasoline demand (-40% y/y). We count on refining margins to return to their previous cycle common in 1HCY22.
Better-than-normative advertising and marketing margin at present crude value: Retail costs of gasoline and diesel have elevated by Rs 11th of September/lt because the elections ended. OMCs haven’t diminished retail value whilst crude has come off 8% from its current peak. At the present crude value ($71/bbl), our calculations counsel diesel margins at Rs 4/lt and gasoline margin at Rs 2.5/lt. HPCL has the best leverage to rising advertising and marketing margin on auto fuels.
Maintain ‘Buy’ on beneficial valuation: HPCL trades at 1 s.d. under historic common on P/B and close to the typical EV/Ebitda a number of of the final refining cycle. With OMCs holding retail value of auto fuels regular amid weak spot in crude, HPCL’s advertising and marketing Ebitda will obtain a lift. However, a sustained recovery in GRM to previous cycle common is required for out-perf. Maintain ‘buy’ on HPCL with an unchanged value goal of Rs 370.