HPCL’s external product purchases are the highest across OMCs at 25-30%. Thus, leverage to change in marketing margins on auto fuels remains one of the highest. Given strong visibility on marketing income, firm capacity utilisation, and incremental capacity adds in refining, we upgrade HPCL’s FY17/18ii EPS by 40%, and envisage upside risks to our estimates. At 7.3x FY18ii EPS, valuations are compelling. We expect HPCL to be the biggest beneficiary of fuel price de-regulation.
HPCL’s external product purchases to meet its product sales are the highest across OMCs at 25-30%, which allows it to benefit when outlook on auto fuel sales is firm. Such a revenue model clubbed with access to a vast pipeline network and other first-of-its-kind initiatives such as dynamic pricing model has led to market share gains over the past couple of years. HPCL’s unique refinery configuration allows it to manufacture LOBS, a raw material for lubricants, a segment in which it is a market leader. We expect HPCL to register 5-6% sales growth pa through FY17-18ii.
We upgrade earnings estimates by >40% for FY17/18ii led by turnaround in Bhatinda refinery and upbeat outlook for retail fuel sales. We retain buy on HPCL with SOTP-based target price of Rs 1,570 and view it as the best play on fuel price de-regulation in India.