EUR 120.00 For Business Accounts Only

MOSL: HPCL: Strong GRMs offset by high marketing margin losses in 1QFY23

.  HPCL: Strong GRMs offset by high marketing margin losses in 1QFY23

(HPCL IN, Mkt Cap USD4.5b, CMP INR251, TP INR273, 9% Upside, Neutral)

• HPCL’s reported misses on both EBITDA and PAT were led by lower-than- estimated GRM’s at USD16.6/bbl (-25% v/s our est., +401% YoY, 33% QoQ) and lower refinery throughput at 4.8mmt (-13% v/s our est.; +92% YoY, +3% QoQ).
• Singapore GRM of ~USD21/bbl in 1QFY23 has now fallen to USD8.8/bbl in 2QTDFY23, which would curb strong refining margins in the coming quarter. While refining throughput was at 4.8mmt, it will increase in the coming quarter led by pent-up fuel demand on refinery expansion.
• In the marketing segment, sales volumes were modest at 10.7mmt (+4% v/s our est.; flat QoQ). However, OMCs are estimated to be generating losses of INR6.7/INR16.0 per liter on petrol/diesel at prevailing benchmark prices in 2QTDFY23, respectively. HPCL has the highest leverage to marketing and would suffer from mounting losses in this segment. However, declining crude prices may turn the marketing segment profitable.
• Factoring in the aforementioned, we cut our GRM assumption to USD6.4/ bbl for 2QFY23 and estimate an operating loss of INR23b (v/s an EBITDA of INR70b earlier) for FY23 (keeping FY24E EBITDA unchanged).
• We also highlight that the company is – a) loss of marketing leverage, b) rising debt, and c) project execution risk.
• We expect its consolidated net debt to rise ~1.4x to INR589b in FY24 from INR421b in FY21. We value the stock at 1.0x FY24E P/BV and recommend a Neutral rating with a TP of INR273 (implying 9% potential upside).

 

Reported GRM and throughput below our estimates

• HPCL’s refining throughput was below our est. at 4.8mmt (-13% v/s our est.; +92% YoY, +3% QoQ). Reported GRM was also below our est. at USD16.6/bbl (v/s USD12.5/bbl in 4QFY22).
• Marketing volumes were higher than our est. at 10.7mmt (+4% v/s our est., flat QoQ). While, marketing margin (including inv.) stood at a loss of INR9.8/liter (v/s a gain of INR2.7/5.8 in 4QFY22/1QFY22, respectively).
• Resultant operating loss came below our est. at INR115.5b. Reported loss came in at INR102b (v/s profit of INR18b in 4QFY22).

 

Maintain Neutral due to project execution risk and mounting debt levels

• HPCL’s FY23-FY24E capex stands at ~INR224b and the management has guided that ~30% of its investments in the next five years would be channelized in non-traditional businesses including chemicals, green hydrogen, wind, power, solar energy, etc.
• Completion of various ongoing projects will drive growth over the next 3-5 years, such as: Bhatinda refinery expansion, bottom upgradation unit at Vizag by 3QFY23E, and Rajasthan (Barmer) refinery in FY24E.
• Further, HPCL is working on the petchem integration projects totaling ~6.2mmt (~15% of total refining capacity) over the next 3–4 years:
• Additional cracker at HMEL would have a capacity of ~2.7mmt.
• The Rajasthan refinery would have 2.2mmt of petchem capacity.
• OMPL and MRPL combined should have another 1.2–1.4mmt capacity.
• Despite the potential highlighted above, we maintain our Neutral rating on the stock because of the project execution risk at Vizag and rising debt levels. We value HPCL at 1.0x FY24E P/BV and arrive at a TP of INR273.