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Centrum Broking
HPCL (Add)
CMP: ₹285.1
Target: ₹335
HPCL reported a strong 77/70 per cent y-o-y growth in EBITDA/PAT for the quarter to ₹5,170/2,970 crore, driven by strong marketing margins (38 per cent higher yoy to ₹7494/t), high inventory gains (₹920 crore) and forex gains of ₹250 crore. Marketing volume growth of 7 per cent remains healthy but refining is a worry, with reported GRMs (gross refining margins) declining 36 per cent to $4.5/bbl and core margins of only $2.1/bbl well below Singapore benchmarks. FY19 EBITDA rose 7.5 per cent yoy to ₹11,440 crore but higher depreciation/interest costs has meant PAT declined 5.2 per cent to ₹6,030 crore. Company has seen a 30 per cent yoy expansion in debt to ₹27,200 crore, driven by higher capex and non-payment of DBT liabilities since Q2FY19.
Valuations of 7.7x FY21E EPS/ 4.9x EV/EBITDA and 1.3x P/BV are fairly valuing the risk reward for the company as of now, in our opinion. We agree that near-term momentum is positive, with an expected boost to fuel retail margins post-election results a key driver. However, we are cautious on the prospects for refining margins and marketing volumes over the next 12M. Our EV/EBITDA based valuation (multiples of 5-6x FY21E EBITDA for various segments) delivers a target price of ₹335, 11 per cent upside.
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