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Refining margins disappoint on lower distillate yield, while marketing better than expectations

Our View

Hindustan Petroleum’s Q4FY24 performance showcases surprise weaker refining performance, GRMs drastically missing our estimates. With EBITDA at Rs48bn and PAT at Rs28.4bn, marketing cushioned overall performance. Reported EBITDA and PAT is lower than our estimates and consensus expectations. The reported GRM of USD6.95/bbl and Rs5.5/ltr of blended gross marketing margins, while the core integrated margins stood weaker at USD4.6/bbl. We maintain BUY rating with a revised TP of Rs700 valuing it on SOTP (core business at 6.9x EV/EBITDA and investments at Rs193) including Rs70/shr from Lubes business.

Result Highlights

* EBITDA/PAT at Rs 48/28.4bn is flat/down 11.8% YoY but up 122%/437.4% QoQ. This significantly lower than consensus and our estimates on a fall in integrated margins with a sharp decline in core GRMs due to lower distillate yield and shutdown at Mumbai refinery. The reported GRM of USD6.95/bbl is drastically lower than ours USD 12.8/bbl. We assume core GRM at USD6/bbl, (USD10.7 the prior quarter, USD15.4 a year ago), a USD1.3/bbl discount to the benchmark USD7.3, significantly missing estimates on lower distillate yield of 71.7%. We calculate refining inventory gain at USD0.95/bbl (a loss of USD2.2 the prior quarter and a loss USD1.5/bbl a year ago). Refinery throughput was 5.8mmt at 101% utilization (95% the previous quarter, 113% a year ago).

* Integrated core EBITDA margin of USD4.6/bbl (USD2.6 the prior quarter, USD6.7 a year ago) and our expectation of USD4.8/bbl.

* Core marketing EBITDA was Rs2.4/ltr (negative Rs0.3 the prior quarter, positive Rs1.7 a year back). Domestic marketing throughput was 11.8mmt, up 8.1% YoY and 3.9% QoQ (vs. the industry’s growth of 5.6% YoY and 4.3% QoQ). Motor spirit sales were 2.35mmt (up 8.3% YoY and 3.1% QoQ), and diesel 5.14mmt, up 4.3% YoY and 0.8% QoQ. Industry motor spirit and diesel sales were up 8.5%/4.2% YoY and 2%/0.6% QoQ. Product market shares. Hindustan Petroleum maintained highspeed diesel and motor spirits market shares to 22.4% and 24.9% respectively.

* Capex as per PPAC was Rs43.3bn (Rs138.4bn in FY24); exceeding FY24 target of Rs102.1bn. Debt of Rs602.5bn was up Rs102.6bn QoQ and down Rs42.6bn YoY on improved cashflows in the last 3-quarters.

* FY24 performance: EBITDA at Rs 248.4bn (vs a loss of Rs 75.22bn last year) while PAT at Rs 146.94bn (vs loss of Rs 89.74bn last year) and the reported GRM at USD9.08/bbl (vs USD12.09). The core integrated margins were at USD5.7/bbl vs negative USD1.4/bbl last year while the marketing EBITDA/ltr (Rs) was at 2.6 vs negative 3.5 last year.

Valuation

HPCL has a Rs17.3bn/Rs17.2bn sensitivity to a change of Rs0.5/ltr and USD1/bbl, respectively. A dividend yield of 3.2%/3.6% 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 330/372 and the net debt: equity is highest amongst the OMCs for HPCL at 0.9/0.8x for FY25e/26e. At CMP, the stock trades at 7.6x/7.1x FY25e/26e EV/EBITDA and 1.5x/1.3x P/BV (excl. investments, it trades at 6.1x/5.7x FY25e/26e EV/EBITDA and 1.0x/0.8x P/BV).We maintain a BUY rating and a target price of Rs700 valuing it on a sum-ofparts basis (core business at 6.9x EV/EBITDA and investments at Rs193). including Rs70/shr from Lubes business.

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