Hindustan Petroleum Corporation (HPCL) Research Report By HDFC Sec

Strong foothold

HPCL’s 4QFY18 EBITDA came in at Rs 29.23bn, down 7.5% QoQ owing to 22% decline in GRM to USD 7/bbl and higher opex, up 20% to Rs 33.5bn due to higher repair and maintenance cost. Gross marketing margins were up 50% QoQ to Rs 4.2/ltr. PAT stood at Rs 17.48bn down 10% QoQ on lower other income at Rs 3.43bn (-27.8%).

Oil prices recorded a sharp reversal as Russia and Saudi Arabia deliberated on an increase in oil output by 1mbpd to offset the supply reductions from Iran and Venezuela. As per our economist team, this reversal is in line with the view that the rally in oil prices was a deviation from the market supply demand fundamentals and a moderation in oil price was in the offing. However, the period of low (below USD70/bbl for Brent) oil prices seems to be over and prices will remain at USD 70-72/bbl.

We believe, if oil prices remain over USD 80/bbl for extended period then OMCs may have to share subsidy. This will change the business environment for these companies and investors perception towards them. In this scenario re-rating of these stocks is reasonable. However, at this stage, where at crude oil prices as high as USD 80/bbl, OMCs were able to pass on the inflation by raising the prices and stick to the policy framework. The market concerns are overdone. We do not see any reason for re-rating of OMCs. Our SOTP target is Rs 458 (5x Mar 20E EV/e for standalone refining, 8x EV/e for marketing, 9x for pipeline and Rs 158/sh from other investments). Maintain BUY.

Highlights of the quarter

 Refining volumes were 4.63mmt (-0.2% YoY and +2.4% QoQ. Pipeline throughput was at 5.27mnT (+12.8% YoY, +1.7% QoQ).

 HPCL-Mittal Energy Ltd (HMEL) reported core GRM of USD13.1/bbl (+24.7% YoY). Reported PAT of Rs 17.0 bn.

 Near-term outlook: GRMs should remain strong, owing to strong middle distillate cracks.