Buy HPCL Ltd For Target Rs.600 By Emkay Global Financial Services
Refining weakness drags down earnings
HPCL’s Q4FY24 SA EBITDA was 11% lower than expected at Rs48.7bn, mainly due to lower cracks & discounts, MR shutdown, and intermediate stockgeneration impact (USD1-1.5/bbl), as reported GRM was USD7/bbl vs our estimate of USD13.5/bbl. Marketing performance was better than expected; but gross/net debt was up 21%/23% QoQ to Rs603/546bn as of Mar-24-end. Mgmt. indicated that the Vizag bottom upgradation benefit (+USD2-2.5/bbl of GRMs) would commence from Q3FY25, besides the first crude at Barmer starting in Q4. FY25 capex target is set at Rs180bn vs. Rs143bn in FY24. We maintain a positive stance on HPCL, led by steady marketing outlook, as general elections pass by. We raise FY25-26E EPS by 4-8% each, largely on better marketing margins; retain BUY with 20% higher Mar-25E TP of Rs600/sh.
Result Highlights
HPCL’s refining volume was up 9% QoQ at 5.8mmt, with weaker utilization of 88% at MR, on shutdown. Core GRM was weak, as distillate yield fell to 72% vs 78% QoQ. Blended marketing margin was ~Rs6.7/kg, at a 16% beat. Domestic marketing sales volume grew 8% YoY to 11.8mmt vs 4% for Industry; petrol/diesel sales vol. grew 8%/4% YoY, faring better than PSU peers and in-line with Industry. Pipeline volume rose 6% YoY to 6.5mmt; Other Expenditure/Employee Costs was up 6%/11% YoY at Rs47.6/8.9bn. D/A rose 20% QoQ to Rs16.1bn, with interest cost also up 20%, to Rs7.3bn. ETR was lower at 14.2% due to reversal of tax provision of earlier years. Other Income fell 26% YoY to Rs8.5bn. Share of assoc./JV profits fell to Rs1.5bn vs Rs2.6bn QoQ. HPCL's EBITDA/PAT recovered to Rs251/147bn in FY24, from losses YoY, led by recovery in marketing margins. Board has recommended bonus issue in the ratio of 1:2, and final dividend of Rs16.5/sh, implying 30% annual payout in FY24.
Management KTAs
Russian crude imports share was 30-40% of total imports in FY24. VR is operating at 13.7mmtpa capacity with BUU to commission and stabilize in the next 3-4 months; this would result in 15mmtpa capacity with GRM benefit of USD2-3/bbl on overall VR capacity. Stabilization of the Barmer refinery stream is expected by CY24-end, and crude should flow from Q4FY25. HMEL incurred loss in Q4FY24 due to subdued petchem deltas. Lubes segment generates EBITDA of ~Rs10bn, and preparation is under way for restructuring. HPCL’s FY25 capex target is Rs180bn. Chhara LNG terminal saw commissioning delay due to weather-related challenges, with operations to start in Sep-Oct ’24. HPCL has gained the highest market share among PSUs in MS and HSD.
Valuation and Outlook
We value HPCL on SOTP-EV/EBITDA based methodology, with investment at a 30% holdco discount. We roll over to Mar-26E, and retain our blended target EV/EBITDA at 6.0x. Key risks: Adverse commodity prices & downstream margins; currency movement; government policies; project issues.
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