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Our View

Hindustan Petroleum’s Q1FY25 performance showcases surprise weaker refining performance, GRMs drastically missing our estimates. With EBITDA at Rs21.1bn and PAT at Rs3.6bn, marketing cushioned overall performance, and a subsidy burden of Rs24.4bn on LPG further weakened the reported performance. Reported EBITDA and PAT is lower than our estimates and consensus expectations. The reported GRM of USD5/bbl and Rs3.5/ltr of blended gross marketing margins, while the core integrated margins stood weaker at USD2.1/bbl. We maintain BUY rating with a revised TP of Rs500 (earlier 465) valuing it on SOTP (core business at 7.4x EV/EBITDA and investments at Rs108) including Rs47/shr from Lubes business.

Result Highlights

* EBITDA/PAT at Rs 21.1/3.6bn is down 78.2%/94.3% YoY and 56.1%/87.5% QoQ. This is significantly lower than consensus and our estimates (EBITDA/PAT at Rs 34/11.6bn) on a fall in integrated margins with a sharp decline in core GRMs affected by lower distillate yield and marketing impacted by LPG subsidy burden.

* The reported GRM of USD5.03/bbl is drastically lower than ours USD 5.93/bbl (USD6.95 the previous quarter, USD7.44 a year ago). We assume core GRM at USD5.35/bbl, (USD6 the prior quarter, USD7.6 a year ago), a USD1.95/bbl premium to the benchmark USD3.4, significantly missing estimates on lower distillate yield of 72.7%. We calculate refining inventory loss at USD0.32/bbl (a gain of USD0.95 the prior quarter and a loss USD0.2/bbl a year ago). Refinery throughput was 5.8mmt at 100% utilization (102% the previous quarter, 106% a year ago).

* Integrated core EBITDA margin of USD2.1/bbl (USD4.6 the prior quarter, USD9.4 a year ago) and our expectation of USD3.6/bbl.

* Core marketing EBITDA was Rs0.7/ltr (Rs2.5 the prior quarter, Rs5.8 a year back), higher than our expectation of Rs1.7/ltr. Domestic marketing throughput was 12.1mmt, up 5.6% YoY and 2.3% QoQ (vs. the industry’s growth of 2.5% YoY and -0.8% QoQ). Motor spirit sales were 2.5mmt (up 6% YoY and 3.5% QoQ), and diesel 5.5mmt, up 1.5% YoY and 7.8% QoQ. Industry motor spirit and diesel sales were up 6.7%/1.4% YoY and 6% QoQ for both. The company has a negative buffer amounting to Rs 24.4bn as of Q1FY25 pertaining to LPG subsidy. Product market shares. Hindustan Petroleum maintained high-speed diesel and motor spirits market shares to 21.9% and 24.3% respectively.

* Capex as per PPAC was Rs26.8bn, target of Rs150bn for FY25. Debt of Rs574.1bn was up Rs57.1bn YoY, down Rs28.5bn QoQ on better cashflows in FY24.

Valuation

HPCL has a Rs17.3bn/Rs17.2bn sensitivity to a change of Rs0.5/ltr and USD1/bbl, respectively. A dividend yield of 4%/4.5% FY25e/26e would be key for the shareholders, following the high dividend and bonus issue in FY24. The BV/share for FY25e/26e is at Rs 215/237 and the net debt: equity is highest amongst the OMCs for HPCL at 0.8/0.8x for FY25e/26e.

At CMP, the stock trades at 8.2/7.6x FY25e/26e EV/EBITDA and 1.8x/1.5x P/BV (excl. investments, it trades at 6.9x/6.4x FY25e/26e EV/EBITDA and 1.3x/1.1x P/BV). We maintain BUY rating with a revised TP of Rs500 (earlier 465) valuing it on SOTP (core business at 7.4x EV/EBITDA and investments at Rs108) including Rs47/shr from Lubes business.

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