HPCL - Valuations Leave Enough Leeway For Material Upside; Retain 'Buy': ICICI Securities

ICICI Securities Report

Hindustan Petroleum Corporation Ltd.’s stock price has risen sharply over the last three months. At its current price, valuation stands at three times FY26E price-to-earning ratio and 3.5 times FY26E enterprise value/Ebitda.

This is in contrast to the lows of negative 7.8 times PER and negative 16.5 times EV/Ebitda that it hit during FY23 when the company reported a material loss of Rs 69.8 billion for the year.

Despite this strength, however, we note that its valuation is still at an attractive level and does not fully reflect the structural changes in scale and the company’s potential earnings profile over the next three years.

On a tactical level, near-term margin momentum is starting to reflect in Street’s rising earnings estimates and we believe, this will build further through the course of the next few months.

Our valuation for the company, at ~5.0 times average of FY24- 25E EV/Ebitda for the refining and marketing business, with listed investments valued at 20% discount to current market price delivers a target price of Rs 550 (earlier Rs 365), a material 44% upside from this point on.

Reiterate 'Buy'.

Key upside risks:

1. faster-than-expected revival in benchmark gross refining margins;

2. recovery in petrochemical price realisations;

3. stronger retail fuel margins; and

4. valuation of the associated businesses (city gas distributions, renewables etc.) coming into Street’s estimates.

Key downside risks:

1. Execution delays and longer stabilisation time of the expanded capacity;

2. prolonged downturn in both refining and petchem cycles;

3. adverse promoter (read government) intervention in retail fuel pricing.

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