HPCL’s outlook firm as refining, marketing prospects improve

Company should post good results for March quarter led by higher margins in the two businesses

Investors in Hindustan Petroleum Corporation (HPCL) could be in for a surprise after seeing months of declines in their holding values.

HPCL has been in the limelight ever since Oil and Natural Gas Corporation (ONGC) was asked to acquire the government’s majority stake in the former. HPCL’s share price, on a downtrend journey since its September high of ~493, had lost further ground after details of the acquisition were announced on January 20. The Street was disappointed as it was an off-market transaction between the government and ONGC, and investors did not benefit from the premium ONGC paid to the government or an open offer to minority shareholders. However, analysts said the same was expected and the transaction was balanced for investors of both the firms.

India Ratings had said overall, the acquisition was a winwin for both ONGC and HPCL and found it to be ‘credit neutral’ for HPCL.

Analysts at Motilal Oswal Securities had said that while ONGC would not be penalised through an unwarranted premium, HPCL’s minority shareholders would continue to benefit from the earnings upside.

Against this backdrop, the focus has shifted to HPCL’s fundamentals. Analysts at IIFL said since the merger with ONGC was complete, the shift in focus to integration and strong refining margins should cushion HPCL’s performance. According to most analysts, marketing margins of oil marketing companies (OMCs) should improve along with refining margins in the March quarter (Q4).

HPCL had posted a mixed show in the December quarter. While the gross refining margin (GRM) at $6.1 a barrel improved sequentially from $5.6 in Q2, the per litre marketing gross margin (including inventory) fell sequentially to ~3.1 from ~3.8 as price hikes for retail fuel were lower than the rise in crude oil prices.

Edelweiss Securities said Q4 was expected to be strong for all OMCs as GRMs would improve. The brokerage also expected a sharp recovery in marketing margins after the state elections and, thus raised its FY19 earnings estimates by 6 per cent for HPCL.

Analysts at Motilal Oswal Securities said Q3 witnessed a sharp decline in automobile fuel margins as the rise in crude oil prices did not affect end-consumers in light of Gujarat Assembly elections. But marketing margins have been increasing steadily after Q3. After the recent rally, crude oil prices seem to have stabilised and the exchange rate is still unfavourable, which should help OMCs regain their marketing margins.

A concern area for HPCL is capex. Analysts said the firm’s Visakhapatnam expansion project required capex equivalent to almost half of its market value of ~590 billion, which could affect free cash flow during FY18-20 at the consolidated level. However, adjusted for the expansion, the target prices of IIFL, Edelweiss, Antique Stock Broking and Motilal Oswal hover between ~430 and ~525, indicating 10-34 per cent gains from current levels.