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Performance below expectations on weaker marketing margins

Our View

Hindustan Petroleum’s quarterly performance showcases surprise weaker marketing performance, while GRMs and inventory gains was inline to our estimates. With EBITDA at Rs21.6bn and PAT at Rs5.3bn, the company demonstrated the challenges it faced in marketing of HSD and other key products where gross margins were impacted. Reported EBITDA and PAT is lower than our estimates but closer to the consensus expectations. The reported GRM of USD8.5/bbl and Rs2.9/ltr of blended gross marketing margins, while the core integrated margins stood weaker at USD2.6/bbl. We maintain BUY rating with an unchanged target price of Rs574 valuing it on SOTP (core business at 6.5x EV/EBITDA and investments at Rs83).

Result Highlights

EBITDA/PAT at Rs 21.6/5.3bn is up 29.4%/207% YoY but down 73.7%/89.7% QoQ. This marginally lower than consensus and much lower than our estimates on a fall in integrated margins with a sharp decline in marketing margins for key product HSD and others. The reported GRM of USD8.5/bbl is marginally lower than ours USD 8.8/bbl (USD13.3 the previous quarter, USD9.1 a year ago). We assume core GRM at USD10.7/bbl, (USD10.8 the prior quarter, USD11.4 a year ago), a USD5.3/bbl premium to the benchmark USD5.4. We calculate refining inventory loss at USD2.2/bbl (a gain of USD2.6 the prior quarter, a loss of USD2.3/bbl a year ago). Refinery throughput was 5.3mmt at 95% utilization (111% the previous quarter, 108% a year ago).

Integrated core EBITDA margin of USD2.6/bbl (USD6.2 the prior quarter, negative USD3.9 a year ago).

Core marketing EBITDA was negative Rs0.3/ltr (positive Rs2.4 the prior quarter, negative Rs0.1 a year back). Domestic marketing throughput was 11.4mmt, up 3.7% YoY and 12.7% QoQ (vs. the industry’s growth of 2% YoY and 5.5% QoQ). Motor spirit sales were 2.28mmt (up 3.2% YoY and 2.2% QoQ), and diesel 5.1mmt, up 0.4% YoY and 17.2% QoQ. Industry motor spirit and diesel sales were up 4.7%/1% YoY and 1.4%/13.5% QoQ. Product market shares. Hindustan Petroleum gained high-speed diesel and motor spirits market shares to 22.4% (sharp gain sequentially from 21.7%) and 24.6% respectively.

Capex as per PPAC was Rs28.4bn (Rs95.1bn in 9MFY24); and FY24 target of Rs140bn. Debt of Rs500bn was down Rs17.6bn QoQ and down Rs142.5bn YoY on improved cashflows in the last 3-quarters.

9MFY24 performance: EBITDA at Rs 200.4bn (vs a loss of Rs 123.2bn previous period last year) while PAT at Rs 118.5bn (vs loss of Rs 122bn previous period last year) and the reported GRM at USD9.8/bbl (vs USD11.5). The core integrated margins at USD6.1/bbl vs negative USD4.3/bbl the previous period last year while the marketing EBITDA/ltr (Rs) was at 2.6 vs negative 5.3 last year same period.

Valuation

HPCL has a Rs17.3bn/Rs17.2bn sensitivity to a change of Rs0.5/ltr and USD1/bbl, respectively. An expectation of higher dividend in FY24 (11.2% 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 289/323 and the net debt: equity is highest amongst the OMCs for HPCL at 1.4/1.2/1.0x for FY24e/25e/26e.

At CMP, the stock trades at 6.6x/7.1x FY25e/26e EV/EBITDA and 1.5x/1.3x P/BV (excl. investments, it trades at 5.3x/5.8x FY25e/26e EV/EBITDA and 1.2x/1.1x P/BV).We maintain BUY rating with a target price of Rs574 valuing it on a sum-of-parts basis (core business at 6.5x EV/EBITDA and investments at Rs83).

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