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Weaker refining offset by stronger marketing performance

* HPCL beat our EBITDA estimate in 4QFY24, aided by higher-than-expected marketing margin of INR4.8/lit (est. INR4.1/lit). However, refining segment performance was below expectations, with GRM at USD6.9/bbl (our est. USD12.4/bbl).

* Refinery throughput was above our estimate at 5.8mmt (up 18% YoY) and should improve by another 1.3mmt annually once the bottom upgrade unit is commissioned. The lower-than-expected refining margin in 4QFY24 was attributable to 1) buildup of inter-mediate products (USD1.5/bbl), 2) lowerthan-expected Russian crude discounts, and 3) INR6b inventory loss.

* We have moderated our refining margin assumption to USD8/bbl (from USD9/bbl), given weak start to refining GRM, a decline in Russian crude discounts, and costs related to the commissioning of a bottom upgrade unit. Accordingly, we cut our FY25/FY26 EBITDA estimates by 8% each.

* Other notable updates during the quarter included: 1) Rajasthan refinery remaining on track for commissioning in 4QFY25, and 2) petchem unit at HMEL achieved 90%+ utilization in Jan’24.

* In the marketing segment, sales volumes came in 8% above our est. at 12.3mmt (up 11% YoY). The company expects to clock marketing sales volume of 44mmtpa/45mmtpa in FY24/25. OMCs are again generating strong gross marketing margin of ~INR5 per liter on both petrol/diesel. Among OMCs, HPCL has the highest leverage in marketing and would benefit the most due to an uptick in marketing margins.

* The commissioning of a bottom upgradation unit at its Visakhapatnam refinery would result in distillate yield improving by 10% from FY25 onward. The company expects to maintain a GRM delta of ~USD3/bbl over SG GRM. The demerger of lubricant business also provides a value unlocking opportunity.

* Our marketing margin assumption of INR3.3/lit on petrol and diesel in FY25/FY26 is materially below current margins. We maintain a BUY rating on the stock, valuing it at 1.4x FY26E P/BV to arrive at our TP of INR600.

EBITDA/PAT beat expectations amid strong marketing performance

* Refining throughput was above our estimate at 5.8mmt (+18% YoY). Reported GRM was below our estimate at USD6.9/bbl (-51% YoY).

* Marketing volumes stood at 12.3mmt (vs. our estimate of 11.4mmt, +11% YoY). Marketing margin (including inv.) stood at ~INR4.8/lit (vs. our estimate of INR4.1/lit, +29% YoY).

* Resultant EBITDA stood at INR51.3b (vs. our estimate of INR41b). PAT came in at INR28.4b (vs. our estimate of INR22.1b) due to a lower tax rate.

* For FY24, EBITDA was INR253.6b (vs. a loss of INR57.1b in FY23) and PAT stood at INR146.9b (vs. a loss of INR89.7b in FY23).

* Refining throughput stood at 22.3mmt (+17% YoY). GRM stood at USD9.1/bbl (-25% YoY). Marketing volumes stood at 46.8mmt (+8% YoY).

* Marketing margin stood at INR5.4/lit (loss of INR0.8/lit in FY23).

* HPCL had a cumulative negative net buffer of INR1b as of 31 Mar’24, due to the under recovery on LPG cylinders (INR9.9b as on 31 Mar’23).

* The board has recommended a final dividend of INR16.5/share, i.e. 165% of FV.

* The board has also recommended the issuance of bonus equity shares in the ratio 1:2.

Valuation and view

* We maintain our BUY rating on HPCL and it remains our preferred pick among the three OMCs. We build in marketing margin of INR3.3/ltr in FY25-26E, while MS/HSD marketing margins currently are ~INR5/ltr. We see the following as key catalysts for the stock: 1) demerger and potential listing of lubricant business, 2) the commissioning of its bottom upgrade unit, and 3) the start of Rajasthan refinery in 4QFY25.

* HPCL currently trades at 1.2x FY26E PB, which we think offers a reasonable margin of safety as we estimate FY26 ROE at 17.6%. We value the stock at 1.4x FY26E P/BV to arrive at our TP of INR600.

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