Motilal Oswal 's research report on HPCL
HPCL posted a miss on EBITDA, led by poor refining margin (core at –USD0.9/bbl); while refining throughput (4.0mmt), marketing sales (7.6mmt) and margin (INR8.2/liter) were in line with estimates. On an average, MS and HSD demand was ~63/66% of normal and LPG was ~114% of normal in the quarter for HPCL. Lubes were ~85% of normal for HPCL (i.e. 15% impact on volumes, while industry had ~30%). The company expects some more time before 100% demand is retained, with further pickup in demand from industrial and commercial space. The company foresees demand for MS to be 85-90% and HSD at 80-85% of normal in the near term. LPG demand though should remain strong. HPCL plans to maintain full utilization of its refineries (1QFY21 utilization rate was ~101%), leveraging its marketing business. Borrowings declined for the company to INR366b in Jun’20 (~INR260b long term and the rest in short-term debt), and it is further down to INR310b in Jul’20 (v/s INR430b at end-FY20).
Outlook
While HPCL’s leverage to marketing remains the highest, it is the least preferred in our pecking list due to its high ongoing capex (INR115b for FY21), which would raise its net debt. Additionally, the Vizag expansion, involving a slurry hydrocracker, is expected to face challenges related to execution in FY22E, which could hamper its performance/profitability.
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