HDFC Securities has given a buy recommendation on Hindustan Petroleum Corporation (HPCL) with a target price of Rs 346.
Shares of HPCL traded at Rs 292.65 around 1:30 pm on Wednesday. The brokerage has set a one-year horizon for the stock to hit the target price.
March quarter highlights:
- HPCL’s Q4FY19 Ebitda came in at Rs 5,166 crore, up 76.8 per cent year-on-year (YoY) and 5.4 times quarter-on-quarter (QoQ) primarily owing to Rs 1,164 crore of inventory and forex gains.
- Adjusting to these gains, core Ebitda was Rs 4,002 crore, up 40.4 per cent YoY and 4.5 per cent QoQ.
- Domestic sales volume was 10.11mmt, up 7 per cent YoY while India’s petroleum product consumption was up 4.19 per cent YoY.
- Blended gross margin stood at Rs 6 per litre (up 39.9/65.3 per cent YoY/QoQ).
Investment rationale:
As per the brokerage, HPCL is doubling its existing capacity at the Visakh refinery from 8.3mmtpa to 15mmtpa by FY21 (Outlay Rs 21,000 crore) and increasing it from the current 7.5mmtpa to 9.5mmtpa (Outlay Rs 5,000 crore) at its Mumbai refinery. This will drive the earnings of the refinery business.
OMCs could not take any price hike to compensate for the rising product prices till mid-May in an election-packed environment. Now onwards, normative margins will be restored allowing HP to be the largest beneficiary as its earnings are highly sensitive to changes in the marketing margins (Ebitda contribution of nearly 60 per cent against 55/44 per cent for BP/IOC), the brokerage added.
"Our SOTP target is Rs 346 (6 times March 21E EV/e for standalone refining and pipeline, 7 times EV/e for marketing and Rs 57 per share from other investments," said the brokerage.