Hindustan Petroleum Corporation’s (HPCL’s) Q1FY23 performance was the worst in memory, with an Ebitda loss of Rs 125 bn and net loss of Rs 102 bn (Q1FY22 Ebitda/PAT at Rs 32/18 bn), well below I-Sec estimates of Rs 54.6 bn operating loss and Rs 63.6 bn net loss. The weakness in Q1 was almost entirely driven by material loss on retail fuels and inventory impact in marketing segment (our estimates suggest a massive Rs 141 bn loss in marketing gross margin after excluding refining and pipeline earnings). The loss was offset to a minor extent by strong refining performance with highest-ever throughput of 4.8mt and strong GRMs of $16.7/bbl.
FY23E prospects appear muted despite the assumption of double-digit GRMs, given negligible marketing earnings to offset this advantage. FY24E is likely to see sharp recovery, with 3x increase in refining throughput, thanks to commissioning of ~7mtpa Vizag refinery, 4-5mtpa Rajasthan refinery (50% share) and the expected MRPL merger (~12mtpa) apart from some recovery in marketing. However, we remain cautious due to the corresponding sharp increase in leverage and sharp decline in return ratios over FY22-FY24E. Reiterate Reduce with a revised target price of Rs 220/sh.
Refinery margins strong; marketing drags: Refinery throughput of 4.8mt reflecting >107% utilisation in Q1 was the strongest in four years and GRMs of $16.7/bbl (including undisclosed inventory gains) were also at multi-year highs. However, while marketing volumes of 10.7mt did grow 21% y-o-y, marketing margins remained weak. This weakness was due to continued freeze on price hikes in retail fuels and rising product prices internationally. Blended marketing margins (net of assumed inventory gains) were at a negative Rs 13,200/t, an all-time low for the company.
Refining may stay elevated, but marketing improvement is the key: We continue to build in reasonably strong GRMs over FY23E-FY24E for HPCL which, coupled with the rising throughput, will be a key driver of earnings. However, the extent of losses in marketing remains too material to be offset by refining. Also, while we do build in a substantial narrowing of losses over rest of FY23E, any delays/hurdles in the same would pose a tangible downside to our already reduced FY23E earnings.
Reiterate REDUCE: HPCL is on track to raise its capacity meaningfully. However, abysmal marketing margin prospects, coupled with rising leverage and moderation in GRMs, keep us cautious. We have sharply reduced our FY23E EPS estimates to factor in lower marketing margins and raised FY24E EPS to factor in better GRMs.