IGI Logo

Marketing division holds the edge

Hindustan Petroleum’s refining and marketing divisions make healthy contributions to its EBITDA. We expect the FY26 contribution of refining at 42%, marketing 51%, and pipeline 7%. This is a marketing-skewed stock and not as balanced as BPCL.

Brighter Marketing Outlook: Over the past few months, HPCL retail fuel margins have recovered from weaker numbers with a fall in crude and product prices which were not passed on as the RSP remains unchanged, this is a clear edge for the marketing division. We expect gross marketing margins to be at par with past averages in a base case scenario, at the pre-deregulated of Rs2.7/ltr for both diesel and petrol for FY25e/26e.

GRM environment - super normal, supportive of earnings

Lower global gasoil stocks and robust demand for petroleum products are likely to sustain, keeping key product cracks higher. The company is sourcing over 10% of its crude requirements from Russia, which is at a discount boosting GRMs, least amongst the Indian refiners. The benchmark Singapore GRM and the company’s GRM are trending higher than their last 10-year averages, supported by stronger demand, reduced supply, and lower stocks. We assume FY25 and FY26 GRMs of respectively $8.2 and $7.2/bbl vs the last 7-year average reported GRM of $6.1 and the Singapore GRM of $5.4.

Rajasthan Refinery: The Barmer refinery, a 9mtpa capacity, is expected to be completed by Mar’24. It has total capex outlay of Rs 730bn, of which ~Rs 370bn has been incurred, where HPCL equity contribution is Rs 180bn (total at Rs 244bn). HPCL expects the utilization to reach ~ 80% by end-FY25. GRM guidance provided is of ~USD 15/bbl, a premium over other refineries, expected EBITDA of Rs 80bn from the entire project including petchem. We believe the added capex would dent the balance sheet in case of any disruption, and it could increase by the time project is commissioned or it stabilizes.

Dividend bonanza: We believe HPCL will report its highest ever profitability in a year in FY24, supported by higher GRMs and an improved marketing performance on a fall in crude prices. As per our expectations, HPCL in FY24 could declare a dividend of Rs48/share (yield of ~11% at CMP, highest amongst the OMCs), the company is yet to declare an interim dividend unlike BPCL and IOCL.

Demerger of Lubes business: HPCL has formed a new company, and a PSU requires many approvals. The main objective is to free Lubes from all control, currently its selling 650tmt lube products in a year. It is increasing marketing reach through JV, new geographies, and volume additions. Various options for creating a subsidiary are under contemplation and a decision is expected soon, expecting high value unlocking and boost to the stock price.

Outlook: HPCL has a Rs17.3bn/Rs18.1bn sensitivity to a change of Rs0.5/ltr and USD1/bbl, respectively. An expectation of higher dividend in FY24 (11% yield), 6.5%/6.0% FY25e/26e would be key for the shareholders, compensating of lower dividend of FY23. The BV/share for FY25e/26e is at Rs 309/341 and the debt: equity is highest amongst the OMCs for HPCL at 1.3/1.1/1.0x for FY24e/25e/26e. At CMP, the stock trades at 6.1x/5.9x FY25e/26e EV/EBITDA and 1.2x/1.1x P/BV (excl. investments, it trades at 5.6x/5.3x FY25e/26e EV/EBITDA and 1.0x/0.9x P/BV).We initiate coverage on it, with a BUY rating and a target price of Rs574 valuing it on a sum-of-parts basis (core business at 6.5x EV/EBITDA and investments at Rs80).

Risks: Weaker GRM environment, inventory losses, change in crude prices and adverse government policy of subsidy-sharing, and a weak marketing margins environment.

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632