HPCL shares fall after Q1 results; should you buy?

The state-run oil marketing company reported a consolidated net profit ₹6,765.5 crore in the first quarter of the fiscal year 2023-24 as compared to a net loss of ₹8,557 crore in the same period last year.

The company’s net profit increased by 87.5% from ₹3,608.3 crore in the quarter ending March 2023.

HPCL’s revenue fell to ₹1.18 lakh crore in Q1FY24 from ₹1.21 lakh crore a year ago. 

The company’s average gross refining margin (GRM) stood at $7.44 per barrel in the quarter, dipping by $6.6 per barrel QoQ and $9.25 per barrel YoY. Refining margin declined primarily because of a fall in diesel and ATF spreads.

Read here: HPCL Q1 results: Net profit comes in at ₹6,765.5 crore in June quarter

HPCL Q1 results were largely in-line with most brokerages’ estimates. Here’s what brokerages recommend on HPCL shares and HPCL Q1 results:

Jefferies 

Global brokerage Jefferies believes HPCL’s earnings peaked with a narrowed discount on Russian crude offsetting strength in margin. It said that the valuations were above historical averages.

The brokerage, hence, maintained ‘Underperform’ rating on the stock with a target price of ₹225 per share.

ICICI Securities

HPCL’s QoQ improvement was driven by higher refining throughput, strong marketing volumes and a 2x improvement in blended marketing margin (aided by retail fuel margin of ₹8.7 per litre, up 3.6x QoQ. Overall, FY24E and FY25E are likely to see stronger recovery with sharp increase in refining throughput, led by the commissioning of ~7mtpa Vizag refinery and ~9mtpa Rajasthan refinery (50% share), ICICI Securities said.

The brokerage firm builds in a more conservative marketing margin profile for the rest of FY24E, continued strength in GRMs, steady volume growth for both refining and marketing and an improving balance sheet, coupled with still very attractive valuations.

It has a ‘Buy’ rating on the stock and raised the target price to ₹355 per share from ₹315 earlier.

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Motilal Oswal Financial Services

HPCL reported a miss on the brokerage’s Q1FY24 EBITDA estimate, due to lower than expected GRM and marketing margins. However, it believes that among OMCs, HPCL possesses the highest leverage in marketing and would benefit the most due to strong marketing margins.

The brokerage is of the view that HPCL’s margins may be adversely impacted by retail fuel price cuts due to the upcoming elections and/or a potential increase in crude oil prices, resulting from quota management decisions by OPEC+ nations.

“We highlight that the company is battling a three-headed monster – a) project execution risk, b) rising debt as a result of poor refining margin with delayed stabilization, and c) a loss of marketing leverage in the longer term with capacity expansion at Vizag and the upcoming Rajasthan refinery,” Motilal Oswal said.

Owing to underperformance in Q1FY24, the brokerage firm cuts its EBITDA and PAT estimates by 4% and 8% for FY24, while keeping FY25 estimates broadly unchanged. 

The brokerage reiterated its ‘Neutral’ rating and values the stock at 0.8x FY25E P/BV to arrive at a target price of ₹265 per share.

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Prabhudas Lilladher

The brokerage said that HPCL reported better than expected Q1 results as strong marketing performance drove earnings. It believes refining margins are at risk of declining due to uncertain demand and declining Russian crude oil discounts. Hence, it has factored in GRMs of $5.6 and $5.0 per barrel for FY24 and FY25, respectively. 

It also factors in uncertainty due to upcoming elections as well as uncertainty in oil prices. 

The brokerage changed its rating to ‘Hold’ from ‘Buy’ and cut the target price to ₹264 per share from ₹340 earlier, based on 0.8x P/B FY25E.

Kotak Institutional Equities

With large over-recoveries in retail fuel marketing, HPCL reported a strong Q1. Standalone EBITDA was higher than the full-year EBITDA for several years, but was 14% below our estimate. The miss was due to lower refining margins and higher other expenses, Kotak Institutional Equities said.

With the recent rise in oil prices (and product cracks), marketing margins are at normative levels now. Although concerns on debt have eased, lack of pricing freedom remains our key concern for OMCs, it added. 

The brokerage firm maintained ‘Reduce’ call on HPCL, and raised the target price to ₹280 per share from ₹275 earlier. 

At 12:10 pm, HPCL share price was trading 1.63% lower at ₹271.85 apiece on the BSE.

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Updated: 03 Aug 2023, 12:11 PM IST