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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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