Buy HPCL Ltd for the Target Rs. 520 by Motilal Oswal Financial Services Ltd
Inventory losses weigh on 1Q performance
* HPCL’s 1QFY26 EBITDA was 9% below our est., led by lower-than-estimated GRM (USD3.1/bbl). GRM, adj. for inventory gains, stood at USD6.5/bbl. Marketing margin stood 10% above estimates at INR7/lit. Resultant PAT was 11% below our est. at INR43.7b.
* The Union Cabinet has approved INR300b in LPG compensation to OMCs, which will be paid in 12 tranches. While the disbursement timeline remains undisclosed, we estimate HPCL to receive ~INR40.5b in both FY26/27 (~27% of total compensation). This will result in ~9% increase in HPCL’s FY27E BVPS.
* In our previous note (link), we highlighted that OMCs are entering the last phase of a rally. Since then, HPCL has delivered only 4% return (peak return of 14%). While MS/HSD marketing margins have corrected recently to an average of INR11.3/INR6.7 per lit in 2Q’td (vs. INR12.7/INR11 per lit in 1Q), they are significantly above our assumption of INR3.3/lit. Further, with current LPG underrecovery per cyl declining to INR75-85 (vs. INR160-170 in 1Q), marketing segment should remain strong. Refining segment reported a weak performance in 1Q, as the inventory loss came in significantly above estimate at USD3.5/bbl. In 2Q’td, HSD cracks have risen 34% QoQ to USD13.3/bbl, while MS cracks have declined 23% QoQ to USD8.7/bbl. Fuel oil cracks have again turned negative, averaging - USD4.8/bbl.
* 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 1.2x FY27E P/B, at par with its LTA 1yr fwd. P/B. We estimate the company to deliver 15%+ ROE during FY26/27, and estimate a 4% FY27E dividend yield. We reiterate our BUY rating on the stock with our SoTPbased TP of INR520/sh.
Key takeaways from the conference call
* In 1Q, the company achieved a throughput of 6.7mmt (+16% YoY), with an average capacity utilization of 109%.
* Market sales volume for the quarter reached a record 13mmt (including exports) (+3.2% YoY).
* Capacity utilization target for Chhara terminal: FY26/FY27 - 10-15%/35-40%.
* HPCL has started an EBITDA enhancement program via operational efficiency and targets INR10-15b EBITDA uplift (savings) by Mar’31. 25% savings are locked in and 16% target has already flown in 1Q (~INR0.5b).
* In 1Q, Russian crude proportion stood at 13.2% only.
* 1Q LPG under-recovery stood at INR21.5b (INR167/164/155 per cyl UR in Apr/May/Jun). Current level UR results in INR10b in under recovery per quarter.
* In 1Q, INR14b/INR6b inventory loss pertained to refining/marketing. Due to geopolitical tensions, the company held higher inventories, leading to higher inventory losses.
Miss led by weak refining performance
* HPCL’s EBITDA came in at INR76.7b, down 9% vs. our estimate, due to a lowerthan-estimated GRM, which was 59% below our estimate at USD3.1/bbl.
* Refining throughput was in line at 6.7mmt. Marketing volumes also came in line at 13mmt. ? Marketing margin (including inv.) stood at ~INR7/lit (est. INR6.4/lit). ? LPG under-recovery stood at INR21.5b (down 35% QoQ). ? PAT came in 11% below our est. at INR43.7b. Other income and finance costs were below our estimates. ? In 1Q, HPCL had a forex loss of INR0.7b.
* As of Jun’25, HPCL had a cumulative negative net buffer of INR130b due to the under-recovery on LPG cylinders (INR109b as of Mar’24). ? As of Jun’25, gross debt stood at INR510b (down INR123b QoQ).
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 INR6.5/lit. 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 2QFY26’end, and 3) the start of its Rajasthan refinery in FY26.
* HPCL currently trades at 1.2x FY27E P/B, which we believe offers a reasonable margin of safety as we estimate FY27E RoE of 15%. We value the stock at our SoTP-based TP of INR520/sh. Reiterate BUY.
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