Q3FY24 Review: HPCL: Strong outlook, as shutdown blues over

29 Jan 2024 , 12:05 PM

HPCL’s Q3 standalone PAT of Rs5.3bn vs Rs1.7bn YoY, was below estimates as GRMs disappointed due to CDU the shutdown at Vizag (55 days), hydrocracker stabilisation issues, inventory losses, etc. Marketing sales were up 6% YoY, when autofuel margins are on recovery mode. HPCL expects to reap the benefits of refinery expansion + bottom upgrade at Vizag in phases through FY25, and complete Rajasthan refinery progressively through FY26. Analysts of IIFL Capital Services maintain FY24-26 EPS forecast; valuations are cheap. ADD. 

Shutdown blues: 

HPCL’s Q3FY24 PAT growth of 207% YoY was affected by lower GRMs, as it undertook CDU shutdown at a time when the newly installed hydrocracker was yet to stabilise at Vizag. GRMs at US$8.5/bbl were also dragged by US$2/bbl inventory loss. Marketing volumes were up 6% YoY led by MS, HSD and ATF; depreciation was up 20% YoY (refinery capitalization), but interest lower by 10% YoY. Consolidated PAT was Rs7.1bn vs Rs4.4bn YoY, on the back of turnaround of MRPL (17% stake) and strong performance of HMEL (49% stake, US$14/bbl GRM). 

Strong commentary:                                                                                                                                

During the Q3 call, HPCL CMD Mr Joshi assured investors: 1) At Vizag, the CDU is fully operational, and hydrocracker stabilising. As of now, annualised throughput is ~13.5mn MT (capacity 15mn MT), and should ramp up in FY25. 2) The bottom upgrade project at Vizag should complete in H1FY25, and boost GRMs from Q3. 3) While the Mumbai refinery has oil sourcing from ONGC, Vizag has the ability to process the most complex oil, Russian, which can go up to 35-40%. 4) It has adequately tied up oil until Q1FY25 through mix of term and spot cargos. 5) Outlook on consumption is strong, for which it will continue to expand marketing infra. 6) Rajasthan refinery should be mechanically complete by Q2CY24; product supplies should commence by Q4CY24, and petchem project should reach completion by CY25. 7) Annual capex is seen at Rs140-150bn; debt has peaked out. 

Inexpensive stock:

HPCL expects the plans to demerge the lubricant business (Rs10bn p.a. Ebitda) to crystallise in the next 2-3 quarters, for which the company has appointed a consultant. Some clarity should also emerge on a possible fund infusion by govt/ONGC, and utilisation thereof. Meanwhile, on back of a benign macro, volatility in HPCL’s earnings should subside. FY24 performance, which involves recovery of losses incurred in FY23, may not be seen recurring, which is well appreciated by the investors.