Buy Hindustan Petroleum Ltd for Target Rs.627 by Elara Capitals
Riding on strong fuel cracks
Hindustan Petroleum Corporation’s (HPCL IN) stock price fell 6% in the past three months, and underperformed benchmark Nifty Index (down 2%), due to expectation of LPG losses in Q4 and concern over gasoline/diesel excise duty hike, though partly offset by strengthening refining margin. We reiterate our positive view on HPCL due to weak crude oil price environment, declining capex intensity and commissioning of Rajasthan refinery. Q3FY26 marks another strong quarter for HPCL, with earnings resilience despite operational disruptions at Mumbai refinery, and clearer visibility on structural improvements from refinery upgrades, efficiency initiatives, and balance-sheet repair. The Energy Information Administration expects weak global oil demand growth in CY26 at ~0.86mmbpd YoY, while oil supply is increasing globally, which is bullish for HPCL’s retail margins.
We trim HPCL’s FY26E/27E/28E EBITDA estimates by 5%/6%/5% on weaker INR impacting retail margins, though partly offset by stronger GRMs. We rollover TP to FY28 estimates and retain our TP at INR 627, offering a 46% upside to CMP. We reiterate BUY.
EBITDA grew 18%, led by strong GRMs and lower LPG losses: Q3 PAT was at INR 40.7bn, up 35% YoY (and 6% QoQ). It was lower than our estimate of INR 60.4bn as HPCL reported lower than expected GRM. YoY earnings growth was due to strong GRM and reduced LPG loss.
Marketing margin lower YoY on reduced gasoline/diesel margin: Per calculations, Q3 retail diesel margin was INR 3.9/liter versus INR 5.2/liter in Q2FY26 and INR 9.3/liter in Q3FY25, and gasoline margin was INR 9.0/liter versus INR 9.5/liter in Q2FY26 and INR 12.8/liter in Q3FY25. LPG under-recovery was INR 5bn in Q3FY26 versus INR 31bn losses in Q3FY25. However, it was offset by the government’s LPG compensation of INR 13.2bn. Marketing sales volume rose 4% YoY.
GRMs below estimates: Reported GRM was USD 8.9/bbl versus USD 6.0/bbl in Q3FY25 and USD 8.8/bbl in Q1FY26 (Elara estimate: USD 9.7/bbl), as key product cracks such as gasoil, gasoline and jet fuel grew 62-100% YoY. Reported GRM was impacted by inventory loss of USD 1.3/bbl. GRM was also impacted by ~USD 3.5/bbl given operational issues due to processing of crude oil from B-80 oilfield.
Reiterate Buy with TP of INR 627: Our stance is led by expectations of strong earnings due to weak crude oil price outlook and anticipation of minimal government interference on retail gasoline/diesel prices/taxes.
We trim HPCL’s FY26E/27E/28E EBITDA estimates by 5%/6%/5% on weaker INR impacting retail margins, though partly offset by stronger GRMs. We rollover TP to FY28 estimates and retain our TP at INR 627, offering a 46% upside to CMP. We reiterate BUY.
We expect diesel margin at INR 5.2/liter in FY27E (from INR 5.7/liter) and FY27E GRM at USD 6.5/bbl (from USD 5.6/bbl). We value HPCL on FY27E P/B, assuming FY29E BVPS of INR 470
(from INR 486), 15.6% ROE (from 16.8%), 11.7% cost of equity (unchanged) and 1% long-term growth (unchanged).
Please refer disclaimer at Report
SEBI Registration number is INH000000933.
