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Weaker marketing dents earnings

PAT at INR 5.3bn, down 90% QoQ

Hindustan Petroleum Corporation’s (HPCL IN) Q3FY24 adjusted PAT was at INR 5.3bn versus our estimates of INR 23.7bn, versus adjusted PAT of INR 1.7bn in Q3FY23 and PAT of INR 51.2bn in Q2FY24. Negative surprise was from higher expenses amid refinery stabilization and shutdown as also weaker marketing margin due to market share push. YoY earning growth was led by diesel margin recovery.

Global GRM to remain strong, but stabilization of refineries, the key

HPCL reported a GRM of USD 8.5/bbl (Elara: USD 7.0/bbl), a 36% QoQ decline on fall in diesel and gasoline cracks along-with USD 2.2/bbl inventory loss. We expect HPCL’s FY25E GRM to be above mid-cycle level on tighter refining supply. However, stabilization of Vizag and upcoming Rajasthan refinery by FY26 would be the key.  

Diesel margin corrected QoQ on higher crude prices

Our analysis shows marketing margin for diesel was at INR 0.5/liter versus a loss of INR 4.9/liter YoY and INR 2.3/liter profit QoQ. Gasoline margin was INR 7.8/liter from INR 6.5/liter QoQ and INR 11.7/liter in Q3FY23. Marketing sales volume grew 6% YoY versus IOCL’s 1% YoY. We expect crude prices in CY24E to remain benevolent at ~USD 80/bbl, due to significant 40mn tonnes capacity addition in LNG exports globally, which may impact oil demand, as observed in CY16.  

Valuations: Downgrade to Reduce with a higher TP of INR 450

We raise FY26E EPS by 28% and thus TP to INR 450 (from INR 308) on better GRMs at USD 10.0/bbl (from USD 6.0/bbl) and higher diesel/gasoline margin at INR 3.5/liter (from INR 3.0/liter) on tighter refining supply outlook and benevolent crude prices at ~USD 80/bbl.

We downgrade HPCL to Reduce from Accumulate as the stock has run-up 43% in the past six months, pricing-in the benefit of benevolent crude prices at USD 80/bbl while trading at ~50% premium versus its peers IOCL and BPCL on FY26E EV/EBITDA. We value refining at 5.0x (unchanged) and marketing at 4.5x (from 4.0x) FY26E EV/EBITDA.

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