Buy Hindustan Petroleum Corporation (HPCL), target Rs 463: HDFC Securities

HDFC Securities has a buy call on Hindustan Petroleum Corporation (HPCL) with a target price of Rs 463.

The current market price of HPCL is Rs 286.10.

Time period given by the brokerage is one year when HPCL price can reach the defined target.


View of HDFC Securities on the company:
In last two and half years to a peak in Aug-17, HPCL stock was up 233 per cent (Sensex was up 14 per cent) on account of 124 per cent jump in EBITDA and 133 per cent jump in PAT. However, since recording peaks in Aug-17, HPCL has been largely on a down trend and have sharply underperformed the market. The stock has corrected 42 per cent while Sensex was up 18 per cent. Currently stock is trading at 6.5x FY21E EV/EBITDA and 7.8x FY21E P/E. We believe these valuations are undemanding.

Certainly, inadequate and untimely Petrol and Diesel retail price hikes as oil prices have surged is disturbing and an overhang on the stock. Gross margins are low currently compared to normalised margins. But, we believe that OMCs will be allowed to make normative margins and thus recoup margins like in the past. HPCL’s earnings are highly sensitive to change in marketing margin compared to other OMCs. Therefore, HPCL will be largest beneficiary if there is any increase in marketing margins from current level.

We expect benchmark Singapore GRMs to remain healthy owing to strong global demand for petroleum products in CY18/19. We believe, with recent corrections most negatives seem to be priced in and valuations are compelling. Our SOTP target is Rs 463 (5x Jun 20E EV/e for standalone refining, 8x EV/e for marketing, 9x for pipeline and Rs 159/sh from other investments). Maintain BUY.