HPCL - Facing Headwinds: HDFC Securities

HDFC Securities Institutional Equities

Hindustan Petroleum Corporation Ltd. stock corrected ~22% from its 52- week high and has underperformed the Sensex by ~23% over the last one month.

With most of its product profitability inversely correlated to the oil price, at the current FY25 enterprise value/Ebitda multiple of 7.7 times (a premium of ~31% to its five-year average), we believe the risk-reward in the stock is unfavorable for investors.

Lower rangebound oil prices and discount on Russian crude and not improvement in refining or marketing operations were the key reasons for HPCL’s strong profitability over 9M FY24 and hence we believe it does not deserve a significant premium to historical valuation multiples.

We reiterate our Reduce recommendation on HPCL with a target price of Rs 425/share, owing to the risk of moderation in auto-fuel marketing margins and refining margins. We estimate Ebitda/profit after tax should decline by 13/19% compound annual growth rate over FY24-26E and believe the current multiples of eight times FY25E EPS, 7.7 times FY25E EV/Ebitda and 1.3 times FY25E price/book value remain demanding.

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