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Earnings improve on better marketing margins

Our View

HPCL’s 3QFY23 reported Ebitda stood at Rs 16.7bn (-11% YoY; -212% QoQ), better than our and street estimates as marketing margins possibly stood better than our estimates. Company doesn’t declare marketing margins. The GRM at USD 9.14/bbl however stood marginally below our assessment. The sequential improvement in earnings stemmed from QoQ recovery in Petrol and Diesel retail margins to ~ Rs10/ltr (2Q: Rs(0.04)/liter) and Rs (5.5)/ltr (2Q: Rs (12)/ltr), as global product price moderated, however firm HSD cracks helped sustain GRMs. As we write while Petrol margins have moderated to Rs 6.5/ltr, the loss on retailing of Diesel has also narrowed to Rs (3-4)/ltr. We expect retail marketing to normalize over FY24-25e. BUY with a TP of Rs 320/sh.

Result Highlights

? Profitability: The Ebitda and PAT for the quarter stood at Rs 16.7bn (-11% YoY) and Rs 1.724bn (-80% YoY). The 9MFY23 Ebitda and PAT stood at a loss of Rs (123.2) bn and Rs (121.9)bn, respectively.

? Refinery Utilization: The refining throughput stood 14% YoY & 8% QoQ higher at 4.83mmt, implying a utilization of 109%. The throughout at Mumbai refinery (MR) stood at 2.43mmt, at Vizag refinery (VR) at 2.41mmt. The Vizag refinery while operating at 116% of its pre expansion capacity, is yet to reach full post expansion potential.

? Gross Refinery Margin: GRM for HPCL stood YoY and QoQ higher at USD 9.14/bbl. The GRM for the 9MFY23 stand at USD 11.4/bbl. HPCL, so far has reported weakest GRMs among PSU-OMCs as its Vizag refinery is undergoing expansion and operating below full potential.

? Marketing sales: Total Domestic products sales stood at 10.9mmt (+10% YoY; +11.0% QoQ), vs industry at (+7% YoY; +8% QoQ), during the quarter. MS sales stood at 2.21mmt (+11% YoY and +2% QoQ) vs industry growth of +7.6% YoY & +2.3% QoQ and HSD sales stood at 5.08mmt (+15% YoY & +17% QoQ) vs industry growth figures at: +10.2 % YoY & +17.1% QoQ, respectively.

? Marketing margins: As per our assessment, the retail marketing margin during the quarter stood at Rs 2793/t (2Q: Rs 2250/t) as retailing losses for HSD moderate QoQ and margins for MS turn positive.

Valuation

We maintain BUY rating on HPCL with a TP of Rs 320/sh. We value HPCL on SOTP basis, with an equity value of Rs 258/sh for the standalone business, Rs 54/sh for investment in HMEL Refinery and Rs 10/sh for other investment. At CMP the stock is trading at inexpensive P/BV valuation of 0.8x FY25 BV.

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