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Q2FY23 reported EBITDA negative of Rs15bn (down 150% YoY but up 88% QoQ). This was boosted by Rs56.2bn of LPG under-recovery compensation given by the Govt. for losses incurred for the last 18 months. Adjusted for that, Q2 EBITDA was negative Rs70bn (9% above consensus) due to significant marketing losses in auto fuel retail sales. Total debt touched to Rs685bn (up 45% QoQ) led to D/E ratio 2.5x vs 1.5x in 2QFY22. In H1FY23, HPCL incurred huge marketing losses on auto fuel retail sales (~Rs150bn) & Govt has not provided clarity on auto fuel under-recoveries. Currently, excluding diesel, other oil products are earning healthy marketing margins. We estimate EBITDA recovery in FY24E & FY25E on the back of near to normal margins on auto fuel. This will recede a concerns of higher borrowings. Hence, we reinitiate coverage on HPCL with ADD and SoTP-based Target Price of Rs240/sh. Auto fuel losses reduced sequentially

Refining: Total throughput of 4.5MMT (up 77% YoY but down 7% QoQ), posted GRM of US$8.4/bbl vs.US$16.7/bbl in Q1FY23. Calculated refining EBITDA of Rs15.8bn (up 286x YoY but down 59% QoQ). 

Marketing: Overall oil product sales volume improved by 14% YoY to 10.4MMT, primarily led by petrol (up 12% YoY) and diesel (up 16% YoY), as the private fuel retailers partially stopped operations. In Q2FY23, our calculated gross marketing margins on auto fuel was negative Rs6/lt this implies a gross level loss of Rs150bn (vs. a loss of Rs110bn in Q1FY23). Gross level losses reduced sequentially

1) Govt. introduced SAED on petrol and diesel, and

2) Global petrol prices cooled down.

Major trigger in near term if Clarity from Govt

In Oct’22, Indian refiners imported ~1mbpd (~23% of India’s oil import) of Russian oil at discount rate, helping refiners to post higher GRM. While global oil prices have cooled off from the highs (avg. 3QTD of US$92/bbl vs avg. 1H US$106/bbl) and petrol marketing margins are at super normal profit level of Rs11/lt, on a sale of domestic LPG cylinder OMCs are earning Rs130/cylinder, only diesel margins are in the loss of ~Rs8.5/lt. As per news flow, Oil ministry is seeking a grant for the losses incurred by OMCs on sale of petrol & diesel in 1HFY23. Any clarity from Govt. 1) revision in retail fuel price and 2) one time grant for losses incurred on petrol & diesel could be the biggest trigger for the HPCL. Thus, we estimate, near to normal gross marketing margins on auto fuel in Rs2.75/Rs2.85 per liter in FY24E/FY25E, which is major growth driver in EBITDA a CAGR of 72% over FY23-FY25E.

Reinitiate with “ADD”

Our Target Price for HPCL of Rs240/share is based on a SoTP valuation: a) Core business (Refining + Marketing + pipeline) at an EV of Rs531/sh based on ~6x forward EV/EBITDA; b) Investments at 10% discounts to CMP at an EV of Rs102/sh; and c) net debt of Rs393/sh. HPCL trades at 0.7x of Sept’24 P/BV available at cheapest valuation and offering dividend yield of 5%/8% in FY24/FY25. Thus, We reinitiate coverage on HPCL with “ADD” recommendation. Key risk is Rise in crude price; and 2) delay in clarity from Govt

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