Oil, Gas Sector Check - Demand A Worry, But OMCs Poised For Another Leg Up: Motilal Oswal

Motilal Oswal Report

Hindustan Petroleum Corporation Ltd. remains our preferred pick among the three oil marketing companies. We believe that a combination of stable crude oil prices and refining gross refining margins presents the potential for OMCs to achieve supernormal profits, which are not currently reflected in street estimates.

We model a marketing margin of Rs 3.3/litre for both motor spirit and high speed diesel in FY25-26E, while current gross marketing margins are Rs 12.9/litre for MS and Rs 12.2/litre for HSD.

We see the following as major catalysts for the stock:

1. demerger and potential listing of the lubricant business,

2. commissioning of its bottom upgrade unit in Oct-24 (leading to ~$2/bbl higher GRMs), and

3. start of its Rajasthan refinery in Q4 FY25-end.

HPCL currently trades at 1.5 times FY26E P/B, which we believe offers a reasonable margin of safety as we estimate FY26E RoE of 18.3%. Our SoTP-based target price includes:

The standalone refining and marketing business at 6.7 times FY26 enterprise/Ebitda; Rs 33/share as potential value unlocking from de-merger of the lubricant business; HMEL at eight times P/E based on its FY24 PAT (HPCL’s share), deriving a value of Rs 35/share; and Chhara Terminal at 1x P/B, and HPCL’s HRRL stake at 0.5 times of HPCL’s equity investment in the project to date.

MRPL stake is valued at our target price. Accordingly, we arrive at our target price of Rs 460. Reiterate Buy.

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