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Analyst Corner – HPCL: ‘Neutral’ rating with target price of Rs 295

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Marketing volumes were in line with our estimate at 9.1mmt (+3% QoQ), with marketing margin (including inventory) at Rs5.8/liter (-3% YoY, +2% QoQ).Advertising and marketing volumes have been in step with our estimate at 9.1mmt (+3% QoQ), with advertising margin (together with stock) at Rs5.8/liter (-3% YoY, +2% QoQ).

Undertaking execution danger gaining materiality: HPCL reported an EBITDA in step with our estimate on the again of decrease than estimated refining throughput (at 2.5mmt, 6% decrease than our estimate), regardless of the marginal beat on GRM ($2.4/bbl) and advertising margins (Rs5.8/liter).

Refining efficiency was beneath our estimate resulting from delay within the ramping up of the Mumbai refinery after it was shut down for enlargement. It’s now full, with the utilisation fee at 80% at present; though anticipate some extra time for ramp-up to materialise. The administration expects 100% utilisation in 4QFY22. Decrease refinery run-rates led to larger gas and loss, offsetting higher manufacturing spreads in 2QFY22. SG GRM has improved to $7.5/bbl in October ‘21, though a slower ramp up on the Mumbai refinery could preserve margin beneath stress within the quick time period.

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The Visakhapatnam refinery is working at over 100% capability utilisation. Enlargement of the identical is more likely to be accomplished by December’21, with significant contribution doubtless from 2QFY23. Backside upgradation would see advantages from 4QFY23. The ramp up at Visakhapatnam would face larger challenges because the slurry hydrocracker is a comparatively new expertise, with out a lot of industrial installations.

We spotlight that the corporate is battling a 3 headed-monster: i) lack of advertising leverage, ii) rising debt, and iii) challenge execution. We anticipate consolidated internet debt to rise additional to Rs604 billion in FY24E from Rs421 billion in FY21, nearly 1.4x its present market capitalisation. We anticipate curiosity prices to rise to Rs15.4 billion by FY24E from Rs9.6 billion in FY21. We worth the inventory at 1x December’23E P/BV and advocate a ‘impartial’ score with a goal worth of Rs295.

Main danger to our name can be larger gross advertising margin (though the identical was just below stress in October’21, right down to Rs1.8/Rs3.7 per liter for petrol/diesel from Rs1.3/Rs2.3 QoQ) resulting from a spurt in Brent costs.

EBITDA in line, refinery expansions proceed to tug total throughput: Refinery throughput was 6% beneath our estimate at 2.5mmt (flat QoQ). Reported GRM was barely larger than our estimate ($2/bbl) at $2.4/bbl (v/s $3.3/bbl in 1QFY22).

Advertising and marketing volumes have been in step with our estimate at 9.1mmt (+3% QoQ), with advertising margin (together with stock) at Rs5.8/liter (-3% YoY, +2% QoQ).
EBITDA was in line at Rs30.1 billion, with PAT at Rs19.2 billion (-22% YoY, +7% QoQ) and the tax fee at 18.5%. EPS stood at Rs13.2 (est. Rs 12.2).

In 1HFY22, EBITDA fell 21% YoY to Rs63 billion, with PAT at Rs37billion (-30% YoY). Refinery throughput declined by 37% YoY to 5mmt owing to a deliberate shutdown of the Mumbai refinery. Advertising and marketing volumes grew 12% YoY to 17.9mmt. Reported GRM improved to $2.9/bbl (v/s $2.6 in 1HFY21), whereas advertising margin fell to $5.8/liter (from Rs7.1/liter in 1HFY21).

Valuation and think about – preserve our ‘impartial’ score: On the finish of 1HFY22, standalone/consolidated internet debt decreased ton Rs376billion/Rs387 billion (from Rs 398billion/Rs401 billion on the finish of FY21). Capex for FY22 stands at Rs145 billion (Rs64 billion has been spent in 1HFY22). We preserve our ‘impartial’ score on the inventory, with dangers reminiscent of challenge execution at Visakhapatnam and rising debt ranges.

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