Buy Hindustan Petroleum Corporation Ltd for the Target Rs. 455 by Motilal Oswal Financial Services Ltd
Start-up of multiple projects set to boost earnings
* HPCL’s 4QFY25 EBITDA was 61% above our est., fueled by higher-than-estimated GRM (USD8.5/bbl). GRM adj. for inventory gains stood at USD7.1/bbl. Marketing margin, though weaker than BP/IOC, stood in line with our estimates at INR4.5/lit. Resultant PAT stood 114% above our est. at INR33.5b.
* While we think the rally in OMC stocks is now entering the last phase, we still see a few positive catalysts: 1) 1QFY26 earnings will likely benefit from lower LPG underrecoveries due to an INR50/cyl domestic LPG price hike recently. The decline in propane prices as winter demand wanes provides additional upside; 2) Russian crude proportion for OMCs is expected to rise again in 1QFY26, supporting GRMs; 3) marketing business earnings momentum has remained robust.
* However, the earnings outlook for OMCs is clouded by: 1) expected inventory losses in 1QFY26 amid weak crude price environment (vs. inventory gain in 4QFY25) and 2) the risk of further excise duty hikes for MS/HSD, which can crimp marketing margins; historically OMCs have rarely made over INR8-10/ltr gross marketing margin on MS/HSD for more than two quarters (based on data for the last eight years).
* We continue to prefer HPCL among OMCs due to the following factors: 1) HPCL’s higher leverage toward the marketing segment, 2) higher dividend yield as HPCL’s capex cycle is tapering off, and 3) start-up of HPCL’s multiple mega-projects in the next 12 months providing a push to earnings. ? HPCL currently trades at 1.5x FY26E P/B, slightly above its 10Y average P/B. We have a Buy rating on HPCL.
Key takeaways from the conference call
* In 4Q, INR6b/5.5b inventory gain pertained to refining/marketing.
* HRRL’s CDU is expected to commence operations shortly, with MS/HSD production anticipated to begin by 3QFY26. HRRL will generate USD20/bbl integrated GRM (mid-cycle GRMs considered). Opex will be ~USD5-6/bbl.
* LPG cavern (80tmt) in Mangalore and Bottom Upgradation Unit at Visakh will be commissioned in 2QFY26.
* HPCL is targeting a capex of INR130b-140b in FY26. INR50b/INR50b/INR40b will be spent on Refining/Marketing/Equity contribution in JVs. ? HPCL’s gas sales volume stood at 1mmt+ (+40% YoY). It expects 25-30% YoY growth in volumes.
4Q beat fueled by robust refining performance
* HPCL’s EBITDA stood at INR57.6b in 4QFY25 (61% beat).
* The beat was driven by higher-than-estimated GRM, which was 55% above our estimate at USD8.5/bbl.
* Refining throughput was in line with our estimate at 6.7mmt. Marketing volumes stood at 12.7mmt (est. 12.5mmt).
* Marketing margin (including inv.) stood at ~INR4.5/lit (est. INR4.6/lit).
* LPG under-recovery stood at INR33b (similar QoQ), which we believe could be reversed in due course as LPG remains a controlled product.
* PAT came in 114% above our est. at INR33.5b. Other income and finance costs were below our estimates.
* In 4Q, HPCL had a forex gain of INR468m.
* In FY25, HPCL’s SA net sales were flat YoY at INR4.3t, while EBITDA/RPAT declined 32%/50% to INR171b/73.7b.
* As of Mar’25, HPCL had a cumulative negative net buffer of INR109b due to the under-recovery on LPG cylinders (INR76b as of Dec’24).
* As of Mar’25, gross debt stood at INR633.2b (up INR93b QoQ).
* The Board recommended a final dividend of INR10.5/sh (FV: INR10/sh).
Valuation and view
* HPCL remains our preferred pick among the three OMCs. We model a marketing margin of INR3.3/lit for both MS and HSD in FY26/27, while the current MS and HSD marketing margins are above INR10/lit, respectively. We view the following as key catalysts for the stock: 1) the de-merger and potential listing of the lubricant business, 2) the commissioning of its bottom upgrade unit in 2QCY26, 3) the start of its Rajasthan refinery in FY26, and 4) LPG under-recovery compensation.
* HPCL currently trades at 1.5x FY26E P/B, which we believe offers a reasonable margin of safety as we estimate FY26E RoE of 17.3%. We value the stock at our SoTP-based TP of INR455/sh. Reiterate BUY.
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