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Medium-term prospects bright despite the near-term blip

HPCL missed our EBITDA estimate for 3QFY24 due to a lower-than-expected marketing margin of INR2.7/lit (est. of INR3.4/lit) led by suppressed margins on diesel.

Refinery throughput was in line at 5.3mmt (up 11% YoY). The company expects to clock a refining throughput of 22mmtpa in FY24 (vs. 19mmtpa in FY23) led by the commissioning of expanded capacity at Vizag refinery. Singapore GRM has also rebounded to USD7.2/bbl in 4QFY24’TD (vs. USD5.5/bbl in 3QFY24), which may lead to an improvement in refining margins in the upcoming quarter.

In the marketing segment, sales volumes came in 6% above our estimate at 11.9mmt (up 6% YoY). HPCL expects to clock a marketing sales volume of 44/45mmtpa in FY24/25. OMCs are estimated to be generating strong gross marketing margins of INR11.0/INR8.6 per liter on petrol/diesel currently. Among OMCs, HPCL has the highest leverage to marketing and would benefit the most due to an uptick in marketing margins.

The commissioning of the bottom upgradation unit at Vizag refinery would result in the distillate yield improving 10% from FY25 onwards. The company expects to maintain a GRM delta of USD3.5/bbl over SG GRM. The demerger of the lubricant business also provides a value-unlocking opportunity.

Additionally, our marketing margin assumptions of INR3.3/lit on petrol and diesel each from 4QFY24 are materially below the current margin levels. Owing to these factors, we upgrade HPCL to BUY. We value the stock at 1.3x Dec’25 P/BV to arrive at our TP of INR530.

Miss on EBITDA due to lower-than-expected marketing margin

Refining throughput was in line with our estimate at 5.3mmt (+11% YoY).

Reported GRM was in line with our estimate at USD8.5/bbl (-6% YoY)

For 9MFY24, EBITDA was at INR202.3b (vs. loss of INR103.7b in 9MFY23), with PAT at INR118.5b (against loss of INR122b in 9MFY23).

Valuation and view

Despite a disappointing 3QFY24 earnings performance hit by inventory loss and lower-than-expected marketing margin, we upgrade HPCL to BUY, mainly as we raise our P/B valuation multiple to 1.3x (from 1.1x earlier). We are building in a marketing margin of INR3.3/ltr for FY25-26E, while MS/HSD marketing margins are INR11/8.6 per ltr at present. As such, unless crude prices rise meaningfully or there is a substantial MS/HSD retail price cut, we see some scope for FY25E earnings to get upgraded.

HPCL currently trades at FY26E P/B of 1x, which we believe offers a reasonable margin of safety, given that we estimate FY26E RoE at 20.6%. The lubricant business demerger provides a value-unlocking opportunity too. We value the stock at 1.3x Dec’25 P/BV to arrive at our TP of INR530. We also highlight that we had recently added HPCL to our model portfolio (refer page 7 of 3QFY24 Preview)

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