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Near-term earnings pressure persists

HPCL’s 4QFY26 EBITDA beat our est. by 121% at INR104.3b, due to a higherthan-estimated marketing margin (likely due to inventory gains). Reported GRM stood 9% below our estimate at USD14.5/bbl. Gross marketing margin (including inventory) stood at ~INR6.2/lit (est. INR1.9/lit). Refining throughput was in line at 6.4mmt. Marketing volumes also came in line at 13mmt. PAT also came in 113% above our estimate at INR49b.

* Key things we liked about the result:

1) HPCL posted a strong marketing performance, fueled by inventory gains, with a blended gross marketing margin of INR6.2/lit (vs est. INR1.9/lit).

2) Operational efficiency has increased, with Project Samriddhi 1.0 delivering INR16.9b in benefits (INR7.4b recurring), translating to ~USD0.54/bbl.

3) HPCL’s standalone net debt as of 31st Mar’26 declined to INR475b (from INR632b as of 31st Mar’25).

4) Mega ongoing project commissioning plans are on track with the 3.55mmtpa residue upgradation facility to operate at 100% capacity in 2QFY27; HRRL CDU to operate at 100% capacity in 2QFY27; and the HRRL petchem complex slated for commissioning in FY28.

5) Progress at the Chhara terminal remains encouraging with ~90-95% breakwater completion (can operate for 11 months), which should improve utilization.

* Key monitorables:

1) Domestic LPG losses have worsened sharply recently to ~INR670/cylinder in May’26 (vs. ~INR170/cylinder in Apr’26 and ~INR80/cylinder in 4QFY26).

2) With gross auto-fuel marketing losses still in the range of INR15-25/lit, we see the possibility of an INR4-5/lit MS/HSD retail price hike.

3) With OMCs making huge marketing losses, we believe that some form of government compensation/support remains a possibility.

* Key assumptions: In FY27, we model a consol. EBITDA/PAT of INR117b/24b (down 62%/87% YoY), as we assume:

1) gross MS and HSD marketing margin loss of INR5/2.5 per lit in 1QFY27/2QFY27 (normalizing to INR4.5/lit in 2HFY27-FY28).

2) LPG under-recovery per cylinder of INR200/100 in 1QFY27/2QFY27.

3) GRM of USD14/12 per bbl in 1QFY27/2QFY27 (normalizing to USD7/bbl in 2HFY27-FY28).

* Valuation and view:

HPCL currently trades at 1.1x FY27E P/B. We estimate the company to deliver RoE of 16.2% in FY28 and a 5.4% FY28E dividend yield. We have not assumed any significant benefit from the start-up of a bottom-upgradation unit and Project Samriddhi. We reiterate our BUY rating on the stock with an SoTP-based TP of INR455.

Valuation and view

* HPCL remains our preferred pick among the three OMCs. We model a marketing margin of INR4.5/lit for both MS and HSD in 2HFY27-FY28. We view the following as key catalysts for the stock:

1) the ramp-up of its bottom-upgrade unit by the end of 1QFY27

2) the start of its Rajasthan refinery in 2QFY27.

* HPCL currently trades at 1.1x FY27E P/B. We estimate the company to deliver an RoE of 16.2% in FY28 and a 5.4% FY28E dividend yield. We reiterate our BUY rating on the stock with an SoTP-based TP of INR455.

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