Hindustan Petroleum Corporation Ltd. share price target

HPCL is doubling its existing capacity at Visakh from 8.3mmtpa to 15mmtpa by FY21E (outlay Rs. 210bn) and increasing it from the current 7.5mmtpa to 9.5mmtpa (outlay Rs 50bn) at Mumbai. This will drive the earnings for its refinery business. We remain constructive on HPCL in a falling crude price scenario as it will (1) Reduce Govt's intervention in auto fuel pricing, (2) Reduce working capital, (3) Put subsidy burden overhang to rest. Our SOTP target is Rs 315 (6x Dec 21E EV/e for standalone refining and pipeline, 7x EV/e for marketing and Rs 51/sh from other investments) vs the consensus TP of Rs 340/sh. HPCL reported an in-line revenue/gross profit in Q3. However, EBITDA/PAT were below our estimates by 18.2/26.1% owing to higher operating expenses. We maintain BUY given the impending 55% increase in refining capacity and stable marketing margins.

Average crude oil prices in Q3FY20 remained flattish compared to Q2FY20. On account of stable costs as well as product prices, core marketing margins remained steady during the quarter. The marketing segment reported inventory gain in Q3FY20 against a loss in QFY20. We expect marketing margins to be stable, going forward, as crude prices have declined in the current quarter (Q4FY20-TD). In terms of marketing sales, HPCL reported growth of 3.4% YoY to 9.8 MMT, marginally above our estimates on account of higher petrol and LPG sales. Going forward, we expect marketing sales...

HPCLs lower-than-expected refining and marketing margins led to an EBITDA miss in 3QFY20. We have cut our FY20 EPS by 21% owing to the huge miss during the quarter and in light of the weak GRM outlook (trimmed GRM from USD4.2/bbl to USD3.0 for 4QFY20) and the lack of improvement in In 3QFY20, the company recorded higher-than-expected marketing sales volumes, which partially offset lower-than-expected marketing margins. Implied gross marketing margins at INR4.1/liter were lower than est. For 9MFY20, core GRM was lower by 54% YoY to USD2.4/bbl, with refining throughput down 9% YoY, led by shutdowns for BS-VI upgradation. Marketing margin was higher by 13% YoY to INR4.1/liter, while domestic sale of petroleum products was up 5% YoY at 30.1mmt. We have cut our FY20 EPS by 21% owing to the huge miss during the quarter and in light of the weak GRM outlook (trimmed GRM from USD4.2/bbl to USD3.0 for 4QFY20) and the lack of improvement in diesel cracks ahead of IMO.

Future growth prospects look promising with capacity expansions projects and expected improvement in margins. Hence, we upgrade our rating on the stock to a BUY, with a revised TP of Rs. 312 based on SOTP. Lower throughput affects topline Q2FY20 standalone net revenue fell 9.9% YoY to Rs 60,863cr largely impacted by lower volumes. Crude oil refining throughput declined 4.2% YoY to 4.56mmt primarily due to planned shutdown at Visakh Refinery. Also, pipeline throughput was down 3.8% YoY to 5.05mmt, while marketing volumes grew by 2.8% YoY to 9.4mmt. Also, GRM...

The correction in oil prices led to super-normal marketing margins for OMCs in latter part of last fiscal year, post which marketing margins have stabilised to normal levels. We expect similar profitability from this segment in the coming quarters. In terms of marketing sales, HPCL reported marginal growth of 1.5% YoY to 9 MMT, below our estimates on account of lower than expected diesel sales. Going forward, we expect marketing sales volumes to grow at a rate of ~4%. The crude throughput in Q2FY20 was lower by 4.2% YoY at 4.6 MMT, marginally below our estimate. Going...

HPCL is doubling its existing capacity at Visakh from 8.3mmtpa to 15mmtpa by FY21E (outlay Rs. 210bn) and increasing it from the current 7.5mmtpa to 9.5mmtpa (outlay Rs 50bn) at Mumbai. This will drive the earnings for its refinery business. We remain constructive on HPCL in a falling crude price scenario as it will (1) Reduce Govt's intervention in auto fuel pricing, (2) Reduce working capital, (3) Put subsidy burden overhang to rest. Our SOTP target is Rs 362 (6x Sep 21E EV/e for standalone refining and pipeline, 7x EV/e for marketing and Rs 54/sh from other investments). Maintain BUY. We maintain BUY on HPCL following a decent run in Q2. Furthermore, 55% refinery capacity addition (taking total capacity to 24.5mmt) by FY21E and stable marketing margins post elections gives us confidence in HPCL.

Hindustan Petroleum (HPCL) reported standalone EBITDA/PAT of Rs24.4bn/Rs10.5bn in Q2FY20, missing our estimates of Rs33.3bn/Rs19.8bn due to lower GRMs, higher other expenditure/interest and lower other income. It continued with the old tax regime. Reported and core GRMs stood at USD2.83/USD2.55 per bbl, below our USD5.5-6 expectation, but a trend similar to IOCL. Marketing margins improved 16% qoq to Rs5.7/kg, a 4% beat and better than peers. Total sales volumes grew 3% yoy. though HPCL's capex run-rate is high even as some amount of subsidy payments are pending. Core EPS in Q2FY20 was Rs7.4/share vs. our estimate of Rs12.2/share....

IMO2020 rules to support marketing and refining margins going forward. We lower our earnings for FY20/21 to factor in lower refining margins. During Q2, core performance for HPCL was hit by lower than expected refining profits. However, benign crude prices and recovery in refining margins is positive for the OMCs and we expect recovery in H2FY20. OMCs are also likely to benefit from implementation of IMO2020 effective January given...

TCIEXP: In line quarter; downgrade to ADD on limited upside. TECHM: Enterprise business stage surprising growth. DIVI: Good Q2 beat; FY20 margin guidance cut is negative. GUJGA: Margins decline, robust volumes

HPCL is doubling its existing capacity at its Visakh refinery from 8.3mmtpa to 15mmtpa by FY21E (outlay Rs. 210bn) and increasing it from the current 7.5mmtpa to 9.5mmtpa (outlay Rs 50bn) at its Mumbai refinery. This will drive the earnings for its refinery business. We remain constructive on HPCL in a falling crude price scenario as it will reduce Govt's intervention in auto fuel pricing, reduce working capital and put subsidy burden overhang to rest. Our SOTP target is Rs 381 (6x Jun 21E EV/e for standalone refining and pipeline, 7x EV/e for marketing and Rs 54/sh from other investments). Maintain BUY. Despite an underwhelming Q1, we maintain BUY on HPCL given (1) 55% refinery capacity addition to 24.5mmt by FY21E, and (2) Restoration to normative marketing margins post elections that will benefit HPCL the most of all OMCs as this business contributes ~60% to EBITDA.