Jefferies says that HPCL reported a significant EBITDA beat on much higher inventory gains in refining and marketing than we expected. Marketing volume growth was sharply ahead of industry growth. Marketing profitability is likely to be restored as crude cools and retail price hikes continue. Despite a 3.2x yoy jump in OCF, borrowings were flat due to a large increase in inventories and back-ended capex. Jefferies cut earnings 3%/5% for FY22/23E on ongoing restrictions, maintaining Buy rating on BPCL.

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Jefferies says that Marketing EBITDA was aided by inventory gains of Rs 29.5 bn. Marketing volume +6.3% yoy against +2.5% for industry. Gasoline and diesel market shares were flat and +40bps yoy. Core marketing profitability was lower than our estimate on sharp increase in cost.

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Jefferies says that Retail prices of gasoline and diesel have increased by Rs2.4-2.8/lt since the elections ended. At the current crude price, our calculations suggest further retail price hikes in the range of Rs 0.8-4.6/lt in diesel and gasoline respectively are needed to restore normal margins. At the current crude price, diesel retail prices could peak below Rs 95/lt in major cities to restore normal marketing margin. Gasoline margins could remain under pressure if retail prices are capped below 3-figures in major cities. With diesel c72% of auto fuel volumes, the impact on overall marketing margins could be limited.
Jefferies says that HPCL reported 45 days of inventory, up from 28 days yoy. This was partially offset by a Rs 60 bn yoy decline in government receivables. Despite the highest operating cash flows in its history, borrowings were flat yoy as the company accelerated capex (Rs 86 bn in 2H FY21 vis-a-vis Rs 49 bn in 1H). Capex intensity will remain elevated in FY22E with guidance of Rs 145 bn.

Jefferies have cut marketing volumes by 6% for FY22/23E to factor in the Covid-related restrictions. Jefferies have cut FY22/23E EPS by 3%/5% on the back of the volume cuts. The company announced a dividend of Rs22.75/ share (8.5% yield). HPCL trades at a wider 60% discount to BPCL on fwd book value compared to the historical average of 35%. Maintain Buy on HPCL with an unchanged Rs 370 price target. Jefferies continues to prefer HPCL over BPCL on favourable valuation.