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HPCL reported better-than-expected Q2FY26 earnings, with standalone EBITDA/PAT of Rs76.2/38.3bn, 34%/58% higher than our estimates, driven by better-than-anticipated GRMs and marketing margins. Core GRM of USD8.0/bbl was higher than our USD7.0/bbl estimate. Blended marketing margin at Rs6.9/kg also saw a 9% beat. Reported GRM came in at USD8.8/bbl, while LPG underrecoveries declined 44% QoQ to Rs12bn. Vizag resid upgrade project is under precommissioning, with GRM benefits expected from Q4FY26. Project Samriddhi delivered Rs8.23bn (USD0.5/bbl) in savings; of this, 35% would be recurring. To ensure further savings, the launch of Samriddhi 2.0 is planned in Apr-26. H1FY26 capex stood at Rs61bn; annual capex target is Rs120-140bn. We raise FY26-28E EPS by 13-17%, building in better margins amid a favorable macro environment and sharp management focus on profitability and debt management. We roll over to Sep-27E, raising our TP by 14% to Rs570. We retain BUY on the stock.

Results highlights

HPCL’s refining volumes rose 4% YoY to 6.6mmt, with steady overall utilization at 106%. Distillate yield improved to 78% in Q2 vs 74% QoQ. Domestic sales volume rose 3.4% YoY to 11.2mmt vs industry growth of 1.6% YoY, with overall volumes up 4% YoY to 12.1mmt (3% beat). Exports grew 17% QoQ to 0.91mmt. Petrol/diesel sales rose 5.8%/1.1% YoY vs industry growth of 6.4%/3.3% YoY. Pipeline volume fell 9% QoQ to 6.1mmt (down 6% YoY). Total opex rose 2% YoY to Rs53.6bn (1% below estimate). Finance cost rose 2% QoQ to Rs7.6bn, while net debt grew 10% QoQ to Rs497bn (down 17% YoY). D/A rose 1% QoQ to Rs15.6bn; other income at Rs5.5bn saw a 10% miss (down 8% YoY; up 4% QoQ). Share of profit from JVs was Rs1.9bn vs loss of Rs1.1bn QoQ. Q2/H1FY26 capex stood at Rs32.6bn/61.1bn. Interim dividend declared was Rs5.

Management KTAs

HPCL targets Rs400bn EBITDA once new projects come online. This year’s run rate is Rs286bn so far. Rs25-30bn would come from Vizag resid, Rs50-55bn from Barmer, Rs10bn+ of cost-savings, and the rest from gas, etc. CoD for resid project is 24-Nov-25. It would take a few weeks to stabilize, after which, GRMs would go up by Q4FY26. In Barmer, crude-in is expected in a couple of months, while ramp-up is likely in the ensuing 3 months. The company is not worried about Russian crude as it was just 5% of the overall basket in Q2; HPCL is more inclined to the Middle Eastern and West African grades. LPG under-recoveries are sharply down; regional prices have been weaker, with Indian OMCs having also played a strategic part in reshaping the market. The chlorine crude contamination issue is largely solved, with the last of the affected units coming online

Valuation

We value HPCL on an SOTP-EV/EBITDA-based method, with investment at a 30% holdco discount. We have slightly revised our blended Sep-27E EV/EBITDA target multiple to 6.2x, from 6.5x, in line with that of IOCL. Key risks: Adverse pricing and margins, currency, government policies, and project issues.

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