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HPCL’s Q3FY24 SA EBITDA fell 75% QoQ to Rs21.3bn, due to shutdown at the Vizag Refinery (VR), refining inventory losses, lower spreads, and suppressed marketing margins. EBITDA saw a slight miss, with mktg weakness & higher opex largely offset by better reported GRM of USD8.5/bbl (Emkay: USD4.5/bbl). Core GRM was ~USD11/bbl. Blended mktg margin came in 20% below estimate, with some weakness in seen non-auto-fuels (albeit denied by Mgmt). Gross debt fell 3% QoQ to Rs500bn. Mgmt guided to a healthy earnings outlook, while estimating expanded & upgraded VR to start from Q3FY25. Also, Barmer would commence production by H2CY24. We remain constructive on OMCs, on a steady marketing environment, with general elections closing in. We raise FY24E EPS 17% and FY25/26E EPS 9% each, on better GRMs and below operating-line adjustments; retain BUY; revised Dec-24E TP of Rs500/sh.

HPCL: Financial Snapshot (Standalone)

Result Highlights

HPCL’s refining volume was down 7% QoQ at 5.3mmt, with weaker utilization, of 95% at 12.7mmtpa VR capacity. Core GRM was flat QoQ. Blended mktg margin was ~Rs3.6/kg vs. ~Rs6.3/10.5 per kg in Q2FY24/Q1FY24. Domestic marketing sales grew 4% YoY vs. 2% industry growth, while overall sales growth was 6% on higher exports. Petrol/diesel sales volume growth was 3%/flat YoY for HPCL vs. 5/1% for the industry. Pipeline volume was up 15% YoY; Other Expenditure was up 25% YoY/29% QoQ to Rs46bn. Depreciation rose 8% QoQ to Rs13.4bn, while interest was up 6% to Rs6.1bn. Other Income was up 93% YoY at Rs5.6bn. Share of assoc./JV profits was down 10% YoY to Rs2.6bn. 9M capex stood at Rs103.5bn. Board declared interim dividend of Rs15/sh.

Management KTAs

VR is currently operating at 13.7mmtpa of expanded crude capacity. Distillate yield improvement of 10% could be seen from CY24-end, besides the full potential of bottom upgradation & expanded capacity of 15mmtpa from Q3FY25. HPCL utilizes Russian crude only at VR (+30% of its imports). It has tied up crude till Mar-24 and Red Sea issues have not had much of an impact. Barmer refinery’s physical progress is ~75%, with completion/refined oil output/petchem expected by mid-CY24/CY24-end/CY25. Total capex incurred so far is Rs400bn, while total commitment is +Rs680bn. HMEL’s petchem plant is expected to break even by Mar-24. Breakwater work is under way at Chhara, while connectivity soon see completion. Debt should remain rangebound in the near term and reduce to Rs350-400bn in coming 3-4years. Capex target for FY24/25 is Rs140/140- 150bn. Auto-fuel pricing decision would be taken once global rates stabilize.

Valuation and Outlook

We value HPCL on SOTP-EV/EBITDA based methodology, with investments at a 30% holdco discount. We roll over to Dec-25E, and retain our blended target EV/EBITDA at 6.1x. Key risks: Adverse commodity prices & downstream margins; currency movement; government policies; project issues.

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