HPCL share price: Sharekhan says that Hindustan Petroleum Corporation reported a strong Q4FY2021 operating profit/ PAT of Rs 4368 cr / Rs 3018 crore, up 45.5%/28.2% qoq and a beat of 48%/60% versus estimate of Rs 2946 cr/Rs 1882 cr. The large beat in the earnings was led by sharply higher than expected reported GRM at $8.1/bbl (versus expectation of $4.4/bbl) and better than expected volume performance. Implied marketing EBITDA margin (including inventory gain) was also better than-expected at Rs 2894/tonne (down only 1% qoq). HPCL gained market share gain in diesel (volume up by 6% yoy versus industry growth of 4.1% yoy), while it maintained market share in petrol (volume growth of 9.8% yoy versus industry growth of 9.7% yoy). 

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Sharekhan believes that the likely decline in marketing sales volume in Q1FY2022 (auto fuel volume down 30% versus normalised level in May 2021) would be temporary and expects the same to normalise as lockdowns ease and the vaccination drive improves. Among OMCs, Sharekhan believes HPCL is best placed given its high exposure to marketing business (marketing sales volume more than 2x of refining throughput) given market share gains, potential improvement in auto fuel marketing margin (expected to normalise soon as OMCs have resumed daily petrol/diesel price hikes) and nearing completion of refinery capex. 

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Overall, core earnings of HPCL are expected to improve with a cyclical recovery in refining margin and structurally better marketing margin over FY2022-FY2023. HPCL’s valuation of 0.9x its FY2023E P/BV and 5.1x its FY2023E EPS (31% discount to historical multiples and 62% to that of BPCL) is attractive, given expectation of improvement in core earnings, healthy RoE of 19% and dividend yield of 7-8% Hence, Sharekhan maintain a Buy rating on HPCL with a revised price target of Rs 340. 

HPCL Key positives:

Better-than-expected core GRM of $3.5/bbl (versus negative $1/bbl in Q3FY21) and outperformed Singapore complex GRM of $1.8/bbl in Q4FY2021
HPCL gained market share gain in diesel with volumes rising 6% y-o-y versus a 4.1% y-o-y growth in industry volumes in Q4FY2021
The board declared dividend of Rs. 22.75/share for FY2021, which implies a high dividend yield of 8.2%

HPCL Key negatives:

Debt increased by 20% qoq to Rs 40009 cr as of March 2021

HPCL Key Risks:

Prolonged weakness in refining margin and lower-than-expected marketing sales volume amid the COVID-19 economic slowdown could impact earnings outlook and valuation