Buy HPCL Ltd for the Target Rs 470 by Motilal Oswal Financial Services Ltd
Near-term marketing outlook remains challenging
* HPCL reported an operating loss of INR161.3b (est. operating loss: INR117b) due to weaker-than-estimated marketing margins. Reported GRM (excl. impact of SAED) stood 33% above our estimate at USD23.8/bbl. Gross marketing margin (including inv.) stood at negative ~INR14.9/lit (est. negative INR9.4/lit). LPG under-recovery stood at INR56b (vs. INR13.4b in 4Q). Loss after tax stood at INR115b (est. loss: INR99b).
* Things we liked about the result:
1) HRRL is expected to run at 50% in 2QFY27, 80-85% in 3QFY27, and near-full refining utilization by 4QFY27. This shall significantly reduce HPCL's external product purchases, supporting marketing margins from 2HFY27.
2) During 1Q, Chhara Terminal secured the Gujarat Maritime Board's in-principle approval for all-weather operations.
3) The company is adequately covered on crude through end-Aug’26, ensuring robust refining capacity utilization.
* Key monitorables:
1) Domestic LPG losses surged to ~INR510/cylinder in 1QFY27 (vs. ~INR80/cylinder in 4QFY26). Further, losses remained high at INR490/cylinder in Jul’26.
2) With renewed US-Iran tensions and escalating Russia-Ukraine conflict, crude prices have rebounded to USD90-100/bbl. Combined with multi-year high gasoline, diesel, and ATF cracks, this is likely to keep marketing margins under pressure in the near term. Additionally, we see an increased risk of a higher Special Additional Excise Duty (SAED) on MS, HSD, and ATF. 3) With OMCs making huge marketing losses, we believe that some form of government compensation/support remains a possibility.
* Valuation and view: HPCL currently trades at 1.2x FY27E P/B. We estimate the company to deliver RoE of 17.3% in FY28 and a 5.5% 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 INR470
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