Neutral HPCL; target of Rs 267: Motilal Oswal

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26 Aug, 2025 12:21

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Motilal Oswal's research report on HPCL

HPCL’s reported EBITDA beat on our estimates was primarily driven by higher-than-estimated marketing gross margin (INR2.7/liter, -54% YoY, -9% QoQ), while GRM was a miss by 37% and stood at USD12.5/bbl. Refining throughput was in line and stood at 4.7mmt (+7% YoY, +11% QoQ). Singapore GRM has been at a record high of USD22.6/bbl in May’22 from a loss of USD1.5/bbl in May’20 (during the pandemic). It stood at USD2.1/ USD18.6 per bbl in May’21/Apr’22. However, OMCs are estimated to be generating losses of INR8.8/INR12.9 per liter on petrol/diesel at prevailing benchmark prices, respectively. HPCL has the highest leverage to marketing and would suffer from mounting losses in the marketing segment. Factoring in the aforementioned, we raise our FY23 EBITDA/EPS estimate by 19%/31%, respectively, due to an upward revision in our GRM assumption for 1QFY23E (keeping FY24E EBITDA/EPS unchanged). We also highlight that the company is Battling a three headed-monster – a) loss of marketing leverage, b) rising debt, and c) project execution risk.

Outlook

We expect consolidated net debt to rise ~1.1x to INR467b in FY24 from INR421b in FY21. We project interest costs to increase to INR24.3b by FY24 from INR9.6b in FY21. We value the stock at 0.8x FY24E P/BV and recommend a Neutral rating with a TP of INR267 (implying 10% potential upside). Major upside risk to our call will be stronger gross marketing margin.

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