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GRMs in line; earnings beat on lower marketing losses

HPCL’s standalone 3QFY23 EBITDA was higher at INR 16.7bn (vs. JMFe/consensus of INR 12.5bn/ INR 6.1bn) mostly due to better-than-expected marketing segment earnings as reported GRM was marginally lower at USD 9.14/bbl vs. JMFe of USD 9.3/bbl (though it was lower than IOCL and BPCL’s reported 3QFY23 GRM of USD 12.93/bbl and USD 15.9/bbl, respectively). Hence, refining segment implied reported EBITDA was largely in line at INR 19.4bn. However, our calculations suggest that HPCL’s loss in the marketing segment was lower at ~INR 3.4bn vs. JMFe of loss of INR 7.6bn (and significantly lower than IOCL and BPCL’s likely marketing loss of INR 68bn and INR 31bn respectively in 3QFY23). Gross debt (excluding lease liability) declined by INR 43bn QoQ to INR 642bn at end-3QFY23. At CMP, HPCL is trading at ~0.8x FY24 P/B (vs. 3-year avg of 0.9x and 10-year avg of 1.0x). Hence, despite significant risk to marketing segment earnings due to sustained high crude price, we maintain BUY on HPCL with an unchanged TP of INR 260

* Reported GRM marginally lower at USD 9.14/bbl vs. JMFe of USD 9.3/bbl: HPCL’s standalone 3QFY23 EBITDA was higher at INR 16.7bn (vs. JMFe/consensus of INR 12.5bn/ INR 6.1bn) mostly due to better-than-expected marketing segment earnings as reported GRM was marginally lower at USD 9.14/bbl vs. JMFe of USD 9.3/bbl. As expected, forex loss was high at INR 4.0bn in 3QFY23 (though it moderated from a high INR 6.0bn in 2QFY23). Hence, reported PAT was also better than expected at INR 1.7bn aided by lower taxes (vs. JMFe/consensus of INR 0.4bn/ negative INR 6.4bn). Refining segment implied reported EBITDA was largely in line at INR 19.4bn as reported GRM in 3QFY23 was only marginally lower at USD 9.14/bbl vs. JMFe of USD 9.3/bbl (though lower than IOCL and BPCL’s reported 3QFY23 GRM of USD 12.93/bbl and USD 15.9/bbl, respectively). Refinery throughput was in line at 4.8mmt (vs. 4.5mmt in 2QFY23).

* Marketing losses significantly lower at ~INR3.4bn vs. JMFe of loss of INR 7.6bn: Our calculations suggest HPCL’s loss in the marketing segment was lower at ~INR 3.4bn in 3QFY23 (including likely inventory loss of INR 2.4bn) vs. JMFe of loss of INR 7.6bn (and significantly lower than IOCL and BPCL’s likely marketing loss of INR 68bn and INR 31bn respectively in 3QFY23). This implies normalised marketing EBITDA of negative INR 33/tn vs. JMFe of negative INR 500/tn (and vs. negative INR 3,000/tn for IOCL and INR 1,800/tn for BPCL in 3QFY23). Marketing sales volume was higher at 11.3mmt (vs. JMFe of 10.7mmt and vs. 10.4mmt in 2QFY23). HPCL’s implied market share in 3QFY23 was flat QoQ at 25.0% in MS (vs. 25.0% in 2QFY23) but slightly lower at 22.2% in HSD (vs. 22.5% in 2QFY23).

* Marketing losses moderate but still a concern; however, we maintain BUY on valuation grounds: We cut our FY23 EBITDA to negative INR 32bn (from positive INR 70bn) to align it with 9MFY23 results and given limited clarity on government compensation; however, FY24- 25 EBITDA and TP of INR 260/share are unchanged. At CMP, HPCL is trading at ~0.8x FY24 P/B (vs. 3-year average of 0.9x and 10-year average of 1.0x). Hence, despite significant risk to marketing segment earnings on account of sustained high crude price, we maintain BUY on HPCL with an unchanged TP of INR 260. Key risks: a) sustained high crude price resulting in significant marketing losses; and b) decline in GRM below historical levels.

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