ECONOMY

Three Factors Why Morgan Stanley Is Bullish On HPCL

Shares of Hindustan Petroleum Corp. snapped their five-session losing streak after Morgan Stanley raised its target price on the state-owned oil marketer, citing consolidation in global refining markets, refinery upgrades and improved capital efficiency with share buybacks.

The global investment bank maintained its ‘overweight’ stance on HPCL and hiked its price target to Rs 356 apiece from Rs 246, implying a potential upside of close to 50% from Tuesday’s closing, according to its note. Morgan Stanley also raised its refining margin estimate, turning constructive on domestic retail fuel margins with improved demand.

“After a three-year investment cycle, HPCL is showing signs that it’s ready to emerge stronger in a post-Covid world… HPCL’s earnings look set to outperform global peers as refining upcycle takes shape,” Morgan Stanley said, increasing its FY22, FY23 EPS forecast for HPCL by 32% and 56%, respectively. The company’s buyback programme, according to the financial services provider, should add to its 15% return-on-equity, and the $1.8-billion investment made in gas, biofuels and alternative fuels will further de-risk outlook and valuations.

Three reasons why Morgan Stanley is bullish on HPCL…

Refinery Upgrade

HPCL’s refining portfolio is stepping up in quality to match Asian complex peers as it steadily upgrades its hardware across the portfolio through to 2023, driving consolidated margins to double to $7 per barrel, Morgan Stanley said. These upgrades at the time of global consolidation in the refining industry bode well for the next upcycle, with transport fuels and lubricants in India seeing multi-year growth ahead. “Flexibility to shift product mix and integration into petrochemicals helps HPCL respond to energy transition and should support long-term multiples.”

Portfolio Upgrade

HPCL is pivoting its portfolio to petrochemicals and new alternative energy. “It will play an enabling role in energy transition as 650 fuel stations are already selling alternative fuels and 10% of output will be integrated into chemical by 2024.”

Balance Sheet

Morgan Stanley expects HPCL’s return on capital employed to average 15% over the next three years, and free cash flow to rise as its refinery upgrades unwind by 2023. “The recent flexibility shown in managing balance sheet with buyback programme and dividends post the change in ownership to ONGC also standout.”

Besides, government intervention risks are abating as evidenced by the recent fuel price hikes moving largely in line with oil prices. And while fuel taxes may remain high, with the privatisation of Bharat Petroleum Corp., Morgan Stanley sees scope for multiple expansion as investor scepticism on the stability of fuel marketing margins reduces.

Shares of HPCL gained as much as 4.7% in early trade on Wednesday to Rs 249.5 apiece. Of the 39 analysts tracking the company, 35 have a ‘buy’ rating and four suggest a ‘hold’, according to Bloomberg data. The average 12-month consensus price target implies an upside of 23.8%.

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