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Stronger-than-expected marketing margin drives earnings beat

HPCL’s standalone 2QFY24 EBITDA was significantly higher at INR 82.2bn vs. JMFe/consensus of INR 61.4bn/ INR 57bn despite reported GRM being slightly lower at USD 13.3/bbl (vs. JMFe of USD 14.7/bbl); hence, the beat is driven by significantly higher marketing margin as was witnessed in the case of IOCL and BPCL as well. Our calculations suggest HPCL’s marketing segment EBITDA was significantly higher at INR 49bn in 2QFY24 vs. JMFe of INR 23bn (vs. INR 80bn in 1QFY24). This implies normalised marketing EBITDA of INR 3,948/tn vs. JMFe of +INR 1,500/tn (and vs. INR 1,654/tn for IOCL and INR 2,315/tn for BPCL in 2QFY24). Implied integrated reported EBITDA margin was INR 4,937/tn in 2QFY24 (vs. INR 5,553/tn in 1QFY24). Standalone gross debt rose marginally QoQ to INR 517.6bn at end-2QFY24. At end 2QFY24, standalone net debt was at INR 513.2bn and consolidated net debt was at INR 539.5bn; HPCL capex was INR 72bn in 1HFY24. We maintain BUY (revised TP of INR 280) on valuations (trading at 0.75x FY25 P/B); however, volatile crude price poses a risk to marketing segment earnings as the country enters a critical election phase in the next 6 months.

* Reported GRM a tad lower at USD13.3/bbl vs. JMFe of USD 14.7/bbl: HPCL’s standalone 2QFY24 EBITDA was significantly higher at INR 82.2bn vs. JMFe/consensus of INR 61.4bn/ INR 57bn despite reported GRM being slightly lower at USD 13.3/bbl (vs. JMFe of USD 14.7/bbl); hence, the beat is driven by significantly higher marketing margin as was witnessed in IOCL and BPCL results as well. So, reported PAT was also higher at INR 51.2bn (vs. JMFe/consensus of INR 33.4bn/ INR 32.2bn). HPCL’s reported GRM was slightly lower at USD13.3/bbl vs. JMFe of USD 14.7/bbl (in 2QFY24, RIL’s implied GRM was ~USD 13/bbl, while BPCL, IOCL, MRPL and CPCL’s reported GRM was USD 18.5/bbl, USD 18.1/bbl, USD 17.1/bbl and USD 12.1/bbl, respectively). Hence, refining segment implied reported EBITDA was significantly lower at INR 33bn (vs. JMFe of INR 37bn). As expected, refinery throughput was up 6% QoQ at 5.8mmt. The Visakhapatnam refinery is operating at capacity of 11mmtpa and operated at throughput of 3.23mmt in 2QFY24 (117% utilisation) and Mumbai refinery operating at 106% utilisation with a throughput of 2.52mmt.

* Marketing segment implied EBITDA was significantly higher at INR 49bn vs. JMFe of INR 23bn: Our calculations suggest HPCL’s marketing segment EBITDA was significantly higher at INR 49bn in 2QFY24 vs. JMFe of INR 23bn (vs. INR 80bn in 1QFY24). This implies normalised marketing EBITDA of INR 3,948/tn vs. JMFe of +INR 1,500/tn (and vs. INR 1,654/tn for IOCL and INR 2,315/tn for BPCL in 2QFY24). However, marketing sales volume was 3% below JMFe at 10.7mmt as HPCL’s implied market share in 2QFY24 was lower QoQ at 24.4% in MS (vs. 25.0% in 1QFY24) and at 21.7% in HSD (vs. 22.8% in 1QFY24). Implied integrated reported EBITDA margin was INR 4,937/tn in 2QFY24 (vs. INR 5,553/tn in 1QFY24).

* Maintain BUY on valuation grounds; however, volatile crude price poses a risk to marketing segment earnings as the country enters critical election phase in next 6 months: We maintain our FY24-26 estimates for HPCL; however, TP has INR 280 (from INR 275) due to increase in value of its listed investments (which is valued at CMP less 20% holding company discount). We maintain BUY on valuation grounds, and as risk to marketing segment earning is partly offset by strong GRMs. At CMP, HPCL is trading at 0.75x FY25 P/B (10-year avg: 1.0x). However, HPCL’s earnings will continue to be contingent on volatility in crude price and any further risk to the company’s marketing pricing freedom as India enters a critical election phase in the next 6 months.been raised to

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