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Higher-than-expected GRM leads to a beat on our estimate

* HPCL reported a beat on our 4QFY23 EBITDA estimate led by higher-thanexpected GRM of USD14.1/bbl (v/s est. of USD10.6/bbl; up 12% YoY). PAT was at INR32.2b (v/s est. of INR20.7b) due to higher-than-estimated other income.

* Refinery throughput stood at 5mmt (est. of 4.8mmt; up 6% YoY). Singapore GRM of USD8.2/bbl in 4QFY23 has now dropped to ~USD3.3/bbl in 1QFY24’td, which could hit refining margins in the coming quarter. Besides, over the past few quarters, HPCL’s GRM has been lower than other OMCs (IOCL, BPCL), owing to the ongoing expansion at the Vizag refinery.

* In the marketing segment, sales volumes were in line at 11.1mmt (up 4% YoY). OMCs are estimated to be generating a gross marketing margin of INR7.6/INR10.2 per liter on petrol/diesel in 1QFY24’td. HPCL has the highest leverage to marketing among OMCs and would benefit the most due to improvement in marketing margins.

* We highlight that the company is battling a three headed-monster – a) project execution risk, b) rising debt (INR671b in Mar’23 v/s INR450b in Mar’22) as a result of poor refining margin with delayed stabilization, and c) a loss of marketing leverage in the longer term with capacity expansion at Vizag and the upcoming Rajasthan refinery.

* We expect consolidated net debt to rise to INR747b in FY25 from INR664b in FY23. We value the stock at 0.9x FY25E P/BV and maintain our Neutral rating with a TP of INR270.

Reported GRM above estimate; refinery throughput in line

* HPCL’s refining throughput was at 5mmt (our est. 4.8mmt, +6% YoY, +3% QoQ). Reported GRM stood at USD14.1/bbl in 4QFY23 (v/s our est. of USD10.6/bbl and USD9.1/bbl in 3QFY23).

* Marketing volumes were in line at 11.1mmt (+4% YoY, -1% QoQ) while marketing margins (incl. inv.) stood at INR3.7/lit (v/s INR2.2/lit in 3QFY23).

* Resultant EBITDA stood at INR46.6b (v/s our est. of INR43.3b). PAT came in at INR32.2b (v/s our est. of INR20.7b) due to higher-than-estimated other income at INR11.6b (v/s 2.9b in 3QFY23).

* For FY23, EBITDA loss was at INR57.1b (v/s EBITDA of INR103.3b in FY22), with net loss at INR89.7b (v/s PAT of INR63.8b in FY22). This was primarily due to lower average marketing margin (incl. inv.) at -INR0.8/lit (v/s INR4.3 in FY22), with marketing volumes rising 11% YoY to 43.5mmt.

* Reported GRM stood at USD12.1/bbl in FY23 (v/s USD6.2/bbl in FY22), with refining throughput being up 37% YoY to 19.1mmt.

Valuation and view

* We expect capex at ~INR150b annually during FY24-25. The company plans to enhance its refining and marketing infrastructure, foray into petrochemicals, and expand footprints in Alternate Energy.

* Completion of various ongoing projects is expected to drive growth over the next three to five years such as: Bhatinda refinery expansion, expansion of Vizag refinery, and new Rajasthan (Barmer) refinery in FY24.

* Further, HPCL is working on petchem projects such as setting up of a 4.6mmtpa petrochemical capacity by FY25E along with JVs, which will help the company become the second largest petrochemicals production facility in India.

* Despite the potential highlighted above, we reiterate our Neutral rating on the stock because of the project execution risk at Vizag and rising debt levels. We value the stock at 0.9x FY25E P/BV to arrive at our TP of INR270.

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