HPCL has been the primary gainer of recent macro trends such as: a) low oil prices, b) successful implementation...
HPCL has been the primary gainer of recent macro trends such as: a) low oil prices, b) successful implementation of direct benefit transfer (DBT) for LPG, c) higher than long-term average marketing margins in diesel and petrol after deregulation and d) robust GRMs. The company’s high leverage to marketing business makes it the primary gainer of these trends among all OMCs.
However, we are concerned over the sustenance of some of these macro trends. Marketing margins on petrol and diesel have been consistently declining since the highs in Q4FY15, as crude prices have moved up. Consistent delivery on GRMs at over $5/bbl levels is yet to be tested for HPCL’s refineries, while there is limited data available on operations of the Bhatinda refinery (HPCL-Mittal JV).
We raise HPCL’s earnings for FY16 and FY17 by ~30%, as we raise marketing margin assumptions for petrol and diesel, GRMs and lower interest costs. This improves HPCL’s RoEs to 17% levels. Consequently, we raise P/BV multiple for the core business to1.4x, leading to a 17% increase in HPCL’s target price to R745 per share. Current valuations are factoring that the margin expansion will sustain at the current average, which is the key risk. We downgrade the stock to ‘reduce’. We see more value in upstream PSUs.