On Monday, UBS upgraded Hindustan Petroleum Corp Ltd (HPCL:IN) stock from Neutral to Buy, setting a new price target of INR445.00, a significant increase from the previous INR333.33. The upgrade comes as the firm anticipates a favorable shift in the company's profit dynamics.
Hindustan Petroleum has been noted for its marketing-to-refining ratio of 2.2, indicating that it sells considerably more diesel and gasoline than it produces, by sourcing surplus fuels from other providers. This aspect positions HPCL to potentially benefit the most from a projected shift in profits from refining to marketing sectors.
Additionally, the impending commissioning of the Visakh refinery residue upgrade facility (RUF) is expected to enhance HPCL's distillate yield substantially, from 73% in FY23 to approximately 80% in FY26E. This improvement is anticipated to contribute materially to the company's performance.
Based on these developments, UBS has increased its FY26-27E EBITDA projections for HPCL by 15-22%, which surpasses the consensus estimates by 5-13%. These adjustments are made with the expectation of a 2-7% increase in marketing margins while keeping gross refining margins (GRMs) nearly stable.
The target price-to-earnings (PE) ratio for HPCL has been raised to 8.5x from 7.5x by UBS. This adjustment reflects a forecast that HPCL will reduce its historical valuation discount relative to its industry peers, as the company's strategic initiatives begin to take effect over the coming years.
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