PL Stock Report: Hindustan Petroleum Corporation (HPCL IN) - Q1FY24 Result Update - Strong Marketing performance drives earnings - Downgrade to 'HOLD'

Hindustan Petroleum Corporation (HPCL IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd

Rating: HOLD | CMP: Rs276 | TP: Rs264

Q1FY24 Result Update - Strong Marketing performance drives earnings

Quick Pointers:

♦ Blended implied gross marketing margin came in at Rs8.4/litre in 1QFY24

♦ Risk of decline in gross marketing margins in near term

Hindustan Petroleum Corporation (HPCL) reported better than expected Q1 results with EBITDA of Rs95.2bn (+105% Q/Q; PLe: Rs 75.7bn) and PAT of Rs62.0bn (+92% Q/Q; PLe: Rs56.7bn). Near term earnings as Q1FY24E blended marketing margins remain higher than normative margins.

We also factor in uncertainty due to upcoming elections as well as uncertainty in oil prices.

We change our rating from ‘BUY’ to ‘HOLD’ with a PT of Rs264 (previous Rs340) based on 0.8x P/B FY25E. The change in TP is attributed to change from previous Analyst’s estimates as well as Valuation method from EV/EBITDA to P/B.

♦ Better refining profitability drive earnings: HPCL reported Q1 standalone EBIDTA/PAT of EBITDA of Rs95.2bn (+105% Q/Q; PLe: Rs 75.7bn) and Rs62.0bn (+92% Q/Q; PLe : Rs56.7bn). Consolidated EBIDTA/PAT was at Rs96.5bn (+177% Y/Y) and Rs67.7bn (+179% Y/Y) respectively.

♦ Q4 petrol/diesel volume growth at 13.6%/11.0%YoY: HPCL’s Q1 marketing volumes were impressive on YoY basis with MS sales at 2.3mmt (+9% YoY) and HSD sales at 5.5mmt (+11% YoY). HPCL also recorded its highest ever Pipeline thru-put of 6.4mmt (+13% Y/Y).

♦ Marketing margins high, but unsustainable: Q1 marketing volumes stood at 11.4mmt (Q4FY23 10.7), as marketing margins were at Rs8.4/ltr vs Rs3.7/ltr in Q4FY23.

♦ Refining spreads come off from FY23 high, but remain at elevated levels: HPCL’s Q1 refining margins were at USD7.4/bbl (-47% Q/Q). Refining volumes came in strong at 5.4mmt (+9% Q/Q). Refining margins are at risk of declining due to uncertain demand and declining Russian crude oil discounts. Hence, we have factored in GRMs of USD5.6/5.0/bbl for FY24/25E.

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