Neutral HPCL; target of Rs 216: Motilal Oswal

Motilal Oswal's research report on HPCL

HPCL reported a beat on both EBITDA and PAT in 2QFY23 mainly due to the one-time grant of ~INR56b given on account of LPG under-recoveries. GRM came in at USD8.4/bbl (est. GRM loss of USD3/bbl, 246% YoY, -50% QoQ). Refinery throughput was at 4.5mmt (est. 4.8mmt; +77% YoY, -7% QoQ). Singapore GRM of ~USD7.1/bbl in 2QFY23 has now fallen to USD2.5/bbl in 3QYTD, which would curtail refining margins further in the coming quarter. In the marketing segment, sales volumes were at 10.4mmt (est. 10.1mmt; +14% YoY, -3% QoQ). OMCs are estimated to be generating gross marketing margin of INR10.1 per liter on petrol and loss of INR5.6 per liter on diesel in 3QFY23YTD. HPCL has the highest leverage to marketing and would suffer the most losses in the marketing segment. The government recently approved a one-time grant of INR56.2b to compensate for the under-recoveries incurred on sale of domestic LPG during FY22 and current period, which has been duly recognized by the company in 2QFY23.

Outlook

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 0.9x FY24E P/BV and arrive at a TP of INR216.