Downgrade to Neutral HPCL Ltd For Target Rs.335 by Motilal Oswal Financial Services Ltd
Marketing outlook remains challenging
* HPCL reported a standalone EBITDA of INR93.7b (est. EBITDA: INR17b), due to lower-than-estimated marketing losses. Reported GRM (excluding the impact of SAED) stood 8% below our estimate at USD32.2/bbl. Blended gross marketing margin (including inventory) stood at negative ~INR0.1/lit (est. negative INR7.2/lit). LPG under-recovery stood at INR36.2b (vs. INR56b in 1Q). Standalone PAT above our est. at INR34.8b.
* Marketing margins to remain under pressure on three counts:
1) Brent has averaged ~USD105/bbl in Oct’26 MTD, which sharply raises underrecoveries on regulated auto fuels and LPG. MS/HSD gross marketing losses have been ~INR18/INR31 per lit in Oct’26 MTD
2) diesel GRMs are likely to remain elevated (3x long-term avg. in Oct’26), with the IEA expecting high diesel cracks until 1HCY27, which has mounted pressure on HSD marketing margins
3) there is limited room for a steep auto-fuel price hike before the UP elections. The UP Assembly’s term ends on 22nd May’27. Polls are widely expected in Feb-Mar’27 and could be advanced to avoid clashing with the Census exercise. Punjab, Goa, Uttarakhand, and Manipur also go to polls in CY27, with their assembly terms ending in Mar’27. The ECI has not yet announced dates. Given this, we see little room for a steep pump-price increase over the next 4-5 months.
* Refining gains partly offset by freight: Realized refining margins are likely to be lower than the headline GRMs suggest, as elevated shipping freight costs would offset part of the margin gains.
* Earnings cut primarily driven by marketing segment weakness: Despite a significant beat in 2QFY27 standalone EBITDA, we cut our full-year FY27E standalone estimates. We now expect an operating loss of INR110b for FY27 (earlier operating loss estimate: INR19b).
This reflects
1) higher 2HFY27E gross marketing margin (GMM) losses of INR7.5/ltr on MS and INR3/ltr on HSD (positive GMM of INR4.5/lit earlier)
2) LPG under-recovery of INR150/cylinder in 2HFY27 (nil earlier). The cut is partly offset by our higher 2HFY27E GRM assumption of USD16/bbl (vs. USD6.7/bbl earlier).
* Risk from our crude assumption: We note that our FY28/FY29 crude assumption of USD75/bbl remains conservative. Any upward revision would lead to further earnings cuts for HPCL
* Valuation and view:
HPCL currently trades at 1.5x FY27E P/B. We estimate the company to deliver RoE of 20.4% in FY28 and a 5.6% FY28E dividend yield. We have not assumed any significant benefit from the start-up of a bottom-upgradation unit and Project Samriddhi. Considering the above factors, we downgrade HPCL to Neutral, with an SoTP-based TP of INR335.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
