Macquarie initiates coverage on HPCL, BPCL, IOC at outperform; sees 45-65% upside

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26 Aug, 2025 12:21

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Macquarie Research turned bullish on oil marketing companies as it has initiated coverage with an outperform rating on HPCL, BPCL and IOC and with a bull case target upside of 45-65 percent in one year, citing strong earnings growth.

The brokerage house feels IOC's earnings power is underappreciated as it expects earnings to show a 19 percent CAGR over the next three years, adjusted for inventory impacts, higher than consensus forecast 10 percent growth.

"Incremental drivers of earnings growth include forecast expansion in benchmark refining margins to an average $7 per barrel; the ramp-up of Paradip refinery; an assumed return to 4 percent per annum India oil products volume growth; 30 percent expansion in chemical volumes following the commissioning of a new propylene unit at Paradip; lower interest expenses; and consolidation of an 8 percent farm-in stake in Vankor, Russia," the brokerage house explains.

It says additional growth drivers from FY20 include margin upside from BS-VI fuel specifications upgrades and start of Ennore LNG.

In a bull refining and marketing margin scenario, it feels IOC's return on invested capital could expand to 20 percent and in-turn imply a fair multiple of 9x EV-EBITDA.

While IOC's share price has increased 3x since 2014 (in line with HPCL and BPCL), Macquarie still finds the stock relatively inexpensive at 6.7x one-year forward EV-EBITDA.

The brokerage house sees target price of Rs 550 on IOC, with 40 percent potential upside including dividends.

For BPCL, Macquarie set a target price at Rs 860, implying 25 percent potential upside as it expects company's earnings to show a 16 percent CAGR over the next three years on expansion in Singapore gross refining margin, gradual ramp-up in Kochi phase-2 from second half of CY17 and consolidation of company's 8 percent farm-in stake in Vankor.

In case of HPCL, the brokerage house expects the stock to hit a target of Rs 650, implying 25 percent upside as it sees 18 percent clean earnings growth in FY18 helped by expansion in Singapore GRMs and 26 percent capacity de-bottlenecking (2.3 million tonne per annum) at HPCL's JV Bhatinda refinery.

HPCL's consolidated reported earnings have grown nearly five-fold over the past two years.

Among the Indian oil refining and marketing companies, Macquarie says HPCL offers the highest gearing to refining margins. It expects the benchmark Singapore GRM to expand $1.1 versus FY17 to average a robust $6.7 per barrel over the next three years. Every $1 change in this benchmark impacts HPCL's earnings by a material 15 percent.

Between FY19-20, the brokerage house says HPCL finds itself temporarily stalled at a growth hurdle but it is more constructive on HPCL's growth prospects beyond 2020 due to the gradual ramp-up in 9.7 million tonne per annum of incremental refining capacity that HPCL plans to add at Mumbai and Vizag.

Bull-bear case

In one-year bull case, Macquarie says it expects IOC at Rs 630 (55 percent upside), BPCL at Rs 1,030 (45 percent upside) and HPCL at Rs 890 (65 percent upside), if benchmark Singapore GRM's expand to $8 per barrel, supported by tighter-than-forecast Asian product balances, and marketing margins increase 20 percent due to micro-pricing and daily price reset.

In bear case scenario, it sees 10 percent downside for IOC, 15 percent for BPCL and 35 percent for HPCL, if Singapore GRM's dip to $5 per barrel, marketing margins fall due to higher competition from private players, and India sees zero oil product demand growth.

At 12:12 hours IST, Indian Oil Corporation share price was trading at Rs 433.95, up 2.23 percent while Bharat Petroleum Corporation was at Rs 730.75 and Hindustan Petroleum Corporation at Rs 561.95, up 0.6 percent each.

Posted by Sunil Shankar Matkar