Goldman Sachs sees over 35% rally in HPCL share price; raises price target by 12%, adds to conviction list

Hindustan Petroleum Corporation Ltd (HPCL) shares were trading firm in otherwise weak trade on Friday. HPCL share price has rallied 53.54 per cent From the March lows of Rs 155 apiece. Analysts at Goldman Sachs see over 35 per cent rally in the share price, and have added it to the buy conviction list. The research firm has raised its 12-month target price by 12 per cent to Rs 320 apiece, which is the highest in its Asia refining coverage. Goldman Sachs predicts FY22 free cash flow (FCF) yield of 6 per cent and FY23 FCF of 12 per cent. It hopes of normalization of refining margins, healthy fuel retail margins, and capex completion.

Goldman Sachs expects that a potential fuel excise cut will offset a higher oil price, capex completion, and sustainable fuel retail margins could help reverse the stock’s underperformance. According to the report, investor concerns around fuel margins are too pessimistic as there is a sufficient excise tax buffer with the government to counter rising oil, GST collections now above pre-Covid levels. Also, it believes that the impending privatization of BPCL (Bharat Petroleum Corporation Ltd) should support fuel retailing margins which remain the lowest in the world.

The research and brokerage firm Goldman Sachs noted that as per its investor conversation, the market remains concerned about pressure on fuel retail margins and market-share loss for HPCL, as almost one-third of the Indian fuel retailing market will correspond to private players if the planned privatization of BPCL is completed. HPCL has successfully defended its market share over the past five years. “We do not expect a reversal around these trends as PSU refiners have been aggressively adding fuel retailing locations with limited room for further returns-focused expansion from the private players,” it said.

Key risks to Goldman Sachs ‘buy’ call

HPCL stock continues to trade close to trough valuation multiples (5.2x FY22E EV/EBITDA, at a 35%/25% discount to regional peers/own historical mean). The research firm believes that even the regional refining peers with less stable earnings have rallied to peak multiples into the value rotation. The key risks to its buy call include a higher oil price and currency depreciation could drive lower fuel retailing margins and weaker refining margins, and an excise duty hike could raise retail fuel prices reducing the margin buffer. A slower-than-expected recovery of global GDP growth from the headwind of the Covid-19 outbreak, a slower recovery of the light distillate (gasoline/naphtha) market, and a worse-than-expected general supply/demand balance could be a risk to refining margins. It also noted that the capex completion delays and a longer-than-expected ramp-up time for new capacities coming online are among other risks to its ‘buy’ call to HPCL share price.