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2024-08-24 05:28:41 pm | Source: Motilal Oswal Financial Services Ltd
Buy Hindustan Petroleum Corporation Limited Target Rs. 460 By Motilal Oswal Financial Services Ltd
Buy Hindustan Petroleum Corporation Limited Target Rs. 460 By Motilal Oswal Financial Services Ltd

HRRL — White elephant or prized asset?

* HPCL’s Rajasthan Refinery (HRRL) is set to start operations in FY26 and will add ~30% to HPCL’s refining capacity. At peak capacity utilization (likely in FY28), HRRL will contribute ~37% to HPCL’s FY26E EBITDA. HPCL will account for HRRL on a joint venture basis (74% stake).

* HRRL’s start coincides with what we view as the golden age of refining, as global net refining capacity additions in 2024-30 are estimated to be only 3.3mb/d, implying an average annual net capacity addition of 470kb/d, down 40% compared to the 780kb/d average observed during 2010-19. ? HPCL’s marketing-to-refining ratio is set to improve from 2.1x now to ~1.6x after the completion of its bottom upgradation unit (Oct’24) and HRRL startup, and further to 1x if the merger with MRPL materializes. This will lower earnings volatility/under-recovery related uncertainty and drive structural improvement in the business.

* Lastly, with Castrol trading at 15.5x FY26E EV/EBITDA, the demerger of HPCL’s lubricant business and listing can unlock up to INR33/share in value. ? We reiterate BUY on HPCL with SoTP-based target price of INR460/share.

HRRL to add ~30% to HPCL’s refining capacity

* HRRL will add ~30% to HPCL’s existing refining capacity (adjusted for 74% stake in HRRL).

* After the completion of its bottom upgradation unit and the commissioning of HRRL, the company’s marketing-to-refining ratio will improve to 1.55x from 2.1x, thus lowering earnings volatility from marketing business.

* At peak capacity utilization (likely to be reached in FY28) for both refining and petrochemical units, HRRL will contribute ~37% to HPCL’s FY26E EBITDA.

HRRL to generate >10% RoCE at 100% utilization

* Based on our assumptions, HRRL is estimated to generate RoE of ~5.5% and PAT of INR9.3b in FY28 (~6% of HPCL’s consolidated FY26E PAT of INR100b; adjusted for 74% share).

* Note that while we have assumed mid-cycle margins for both refining and petrochemicals, global capacity growth is decelerating sharply in both segments and every USD1/bbl and USD100/t change in refining/petchem spreads leads to 7%/19% increase in FY27 EBITDA for HRRL.

* While RoE is poor, we estimate HRRL to achieve healthy RoCE of 10.3%/10.6% in FY28/FY29, which will improve to 10.9% by FY30.

We assume GRM of USD8/bbl, mid-cycle petchem margins

* We assume gross refining margin of USD8/bbl and PE/PP spreads over naphtha of USD472/USD468 per ton, based on five-year average spreads.

* We build in refinery utilization of 70%/90%/100% in FY26/FY27/FY28. For the petrochemical unit, we build in utilization of 50%/70%/100% in FY26/FY27/ FY28.

 

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