Hindustan Petroleum Corp.'s ongoing expansion of its refinery capacity would help contain volatility in its earnings, according to brokerages.
This is because the company is heavily reliant on external fuel to meet the majority of its sales demand. As of fiscal 2024, the company's marketing-to-refining ratio stood at 2.1 times. This means that for every unit of fuel the company refines, it sells 2.1 units, necessitating purchase of fuel from external sources to meet sales demand.
This purchase of fuel from external sources exposes the company to fluctuations in fuel prices, which in turn impact its earnings. For this reason, the company's ongoing refinery capacity expansion is key.
Marketing-to-Refining Ratio: What It Means
The oil and gas industry uses the marketing-to-refining ratio as a metric to evaluate a company's dependence on external sources for its fuel supply. It compares the amount of fuel a company sells in its marketing segment to the amount of fuel it refines itself.
A lower marketing-to-refining ratio is generally considered better for an oil and gas company, as it reduces exposure to price fluctuations in the fuel market. By increasing its refining capacity, Hindustan Petroleum aims to improve its financial stability and reduce earnings volatility.
Reducing Marketing-to-Refining Ratio
The capacity addition will help HPCL reduce its marketing-to-refining ratio from 2.1 times to 1 time in the coming years, according to Motilal Oswal.
The bottom-up upgrade at the company's Visakhapatnam refinery would help reduce the ratio to 1.9 times, the brokerage said. While the commissioning of the company's much awaited Rajasthan refinery would further reduce it to 1.5 times.
If the merger with Mangalore Refinery and Petrochemical Ltd. goes through, the ratio could further decrease to 1 time, Motilal Oswal said. This would help reduce earnings volatility for the company
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Ongoing Refinery Capacity Expansion
The Rajasthan Refinery, which will begin operations in fiscal 2026, will be one of HPCL's major refinery capacity additions.
The refinery is set to add 30% to the company's refining capacity. While the management expects that the refinery will reach peak capacity utilization in fiscal 2028, Motilal Oswal expects this could add 37% to Hindustan Petroleum's fiscal 2026 Ebitda. At 100% utilisation, the commission of the Rajasthan Refinery will add a capacity of 6.67 million metric tonne per annum to the company's total refinery capacity.
The company anticipates completing its bottom-up upgrade facility at its Visakhapatnam refinery in the third quarter of fiscal 2025. Once fully operational, this facility will add another 1.3 million metric tonnes per annum to the company's refining capacity.
Furthermore, the government has commented on the possibility of merging Mangalore Refinery and Petrochemicals with Hindustan Petroleum. While the merger does require a careful and detailed assessment, as per the government, the merger could add another 16.6 million metric tonnes per annum of refinery throughput.
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