Maintain ADD on Hindustan Petroleum Corporation - Shining on account of inventory gains! - HDFC Securities

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

We maintain ADD on Hindustan Petroleum (HPCL) with a price target of INR 205, owing to an expected recovery in demand for petroleum products and, subsequently, refining margins. 2Q EBITDA and APAT were 5x and 29x above our estimates owing to higher-than-expected core GRM, marketing throughput, inventory and forex gains. EBITDA came to INR 36bn (vs. EBITDA of INR 23bn in 2QFY20 and INR 44bn in 1QFY21). Refining business' inventory gains were INR 5bn, and marketing inventory gains were INR 13bn. Forex gains stood at INR 5bn. Adjusting for these, core EBITDA stood at INR 13bn (-46/-65% YoY/QoQ).

Refining: Crude throughput in 2Q stood at 4.1mmt (-11/+2% YoY and QoQ). Lower utilisation at the Mumbai refinery amid the lockdown led to lower throughput. Core GRM stood at USD 2.8/bbl vs. USD 2.6/-0.8 in 2QFY20/1QFY21. We expect crude throughput of 16/24mmt and core GRM of USD 3.5/3.8 per bbl in FY21/22E.

Marketing: Domestic marketing sales volume was 8.4mmt (-10/+11% YoY/QoQ). Blended gross margin stood at INR 4.6/lit (+4/-38% YoY/QoQ). We expect blended gross margins to sustain at INR ~4.6 per litre in FY21/22E.

Call takeaways: (1) Buyback: The Board has approved a proposal to buy back up to 0.1bn equity shares of the company for an aggregate amount not exceeding INR 25bn, at a price not exceeding INR 250 per equity share. (2) Vizag and Mumbai refinery expansion to be completed in CY21. (3) Capex of INR 49bn expended in 1H out of the target of INR 115bn in FY21.

Change in estimates: We raise our FY21/22E EPS estimate by 76.5/5.0% each to INR 23.2/34.4 to factor in better performance in the quarter, and have lowered our operating expenses assumptions for the year.

Our SOTP target comes to INR 205/sh (5.0x Sept-22E EV/e for standalone refining, marketing and petchem businesses and 5.5x Sept-22E EV/e for pipeline business and INR 33/sh for other investments. The stock is currently trading at 5.4x on FY22E EPS.

Shares of HINDUSTAN PETROLEUM CORPORATION LTD. was last trading in BSE at Rs.205.1 as compared to the previous close of Rs. 205.25. The total number of shares traded during the day was 846833 in over 10507 trades.

The stock hit an intraday high of Rs. 207.15 and intraday low of 202.4. The net turnover during the day was Rs. 173858362.

Source : Equity Bulls

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