Buy HPCL; target of Rs 1033: KR Choksey

HPCL is a refining and marketing company in India with interests in upstream (6 blocks). It owns 14.8mmt of refining capacity, split across Mumbai (6.5mmt) and Vishakapatnam (8.3mmt). It has a crude and product pipeline network of ~3,015 km and sells ~34.2mmt of petroleum products. HPCL also holds a 16.9% stake in MRPL and 49% stake in 9mmt Bhatinda refinery. HPCL has a market share of 25.15% among PSU in retail sales with a outlet network of 13,802. HPCL is among the largest lube makers in India with sales of 485 TMT. Indian lube market size is 2800 TMT with 7 major players. HPCL is among the largest LPG marketer in the country with the distributorship of 4195 and a market share of 26.8%. HPCL is a state-owned company, with 51.1% Government of India (GoI) stake.

 

We value HPCL at 5.0x for refining and 7x for marketing to arrive at a fair value of INR 1,394 implying a 34.9% upside. On FY17/FY18E, the stock trades at 8.7x/7.9x FY17E/FY18E standalone EPS of INR118/INR130 and 1.5/1.3.x FY17E/FY18E BV. Post de-regulation, we expect marketing division profitability to grow rapidly, hence should also command a higher valuation. We model gross per liter diesel margin of INR1.9/2.2 in FY17/FY18 as compared to INR 1.6 currently.For all recommendations, click hereDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.