Q2FY24 Review: HPCL: Looking to amplify refining gains

8 Nov 2023 , 10:57 AM

Analysts of IIFL Capital Services upgrade HPCL’s FY24/25 PAT by 58%/20% on back of strong H1 performance and benefits of project completion. As such, HPCL’s Q2FY24 performance was well ahead of forecasts on the back of opportunistic oil sourcing supported by inventory gains leading to Rs51bn PAT vs loss YoY. HPCL expects the net debt to have peaked, as the refinery projects complete and consumption remains strong. Timely completion of Rajasthan refinery (FY25/26) which is housed in JV, can propel the consolidated earnings materially (without taking on the associated debt). Valuations are compelling. 

Earnings beat: 

HPCL’s Q2 PAT of Rs51.2bn (loss YoY) was well ahead of forecasts. The product sales/refinery runs were up 3%/28% YoY (Vizag refinery capacity upped from 8.3m MT to 11m MT); the average GRM was US$13.3/bbl vs US$8.4/bbl YoY and US$9.6/bbl SG benchmark on benefits of opportunistic oil sourcing and maximization of high margin products. The profits were also supported by US$3/bbl of inventory gain across the product sold. Its consolidated PAT was Rs58bn vs loss YoY, on the turnaround at MRPL (17% stake: PAT of Rs10.6bn vs loss YoY) and good performance at HMEL (H1 PAT: Rs17bn, GRMs- US$18/bbl). Depreciation was up 15% YoY (refinery capitalization) and yet interest expense was flat (strong OCF). 

Strong growth outlook: 

HPCL during Q2 earnings call shared a strong growth outlook; it 1) expects overall POL consumption in India to grow at 3-4% pa, led by auto fuels; 2) sees bottom upgrade + expansion project at Vizag (to 15m MT) enhancing GRMs by ~US$4/bbl from FY25; the Mumbai refinery subsequent to expansion has stabilised; 2) Rajasthan refinery (set up in JV) is ~70% complete; mechanical completion is seen by Q4FY24; overall project cost is Rs730bn, of which Rs370bn is spent; HPCL has invested 50% of its Rs190bn equity thus far; once complete, project is well poised to earn Rs70-80bn Ebitda; 3) net debt has peaked (Rs518bn total debt as of Q2); 4) Rs140-150bn pa capex will be funded through OCFs and marginal debt. 

Upgrade EPS: 

Analysts of IIFL Capital Services upgrade FY24/25 PAT by 58%/20% to reflect the strong H1 performance and see upsides on stable oil. Completion of key projects should materially improve cash flows, and return ratios. The valuations are compelling at 0.8x FY24 BV, and analysts of IIFL Capital Services see significant scope for re-rating over next 12-18m; key risk is runaway increase in oil prices.