Hindustan Petroleum is the stock of the day for traders, says Anil Singhvi, as buyback talk intensifies

Zee Business Managing Editor Anil Singhvi had clearly mentioned today morning that the stock of the day will be Hindustan Petroleum (HPCL). He recommended buying HPCL in cash with a stop-loss of Rs 178 and Target of Rs 190 and Rs 195. HPCL Board is going to meet on November 4th, to consider a buyback.

Notably, Jefferies has initiated coverage on HPCL with a target of Rs 370 (105% upside potential). HPCL has the strongest marketing business among peers with the best market share defense in the face of rising private competition and the largest value added lubes business in India. A 16% CAGR in marketing EBITDA and a revival in the refining cycle result in a 53% EBITDA CAGR over FY20-23E. Valuation at a 16% discount to five-year average EV/EBITDA is attractive.

30th Oct Strategy:

2 Stocks Out Of F&O Ban:
COFORGE, Idea

Stock Of The Day:

Buy HPCL Cash:
SL 178 Tgt 190, 195
Board meeting to consider buyback on 4th Nov. @ZeeBusiness

— Anil Singhvi Zee Business (@AnilSinghvi_) October 30, 2020

HDFC Securities says that the Base case fair value of the stock is Rs 185 and the bull case fair value of the stock is Rs 198.Hindustan Petroleum Corporation Ltd (HPCL) has a dominant market position as one of India's top three oil marketing companies. HPCL's marketing business is the strongest amongst its peers with consistent market share gains in the auto fuel segment despite rising private competition. Within the OMC basket, HPCL’s overall profitability is highly determined by marketing business (contributed 80% gross profit in FY20). Where it further continues to focus on improvement in marketing margins, HPCL refines less than half the volume that it sells and hence, has the highest leverage to marketing margins.

Expansion Plans:

HPCL is targeting the completion of the Mumbai and Vizag expansions in 2021, followed by upgradation at Vizag in 2022 and Rajasthan (Barmer) refinery in 2023. The company expects all pipeline projects to be completed on time as well.

Emkay reiterates Buy rating on HPCL with a target price of Rs 315. They highlight that the recent stock correction can be due to oil price volatility and concerns about inventory losses. However, lower oil prices should reduce refining fuel & loss (F&L) and improve marketing margins. Emkay believes that lower oil prices, normal refinery operations, reduction in freight rates, realization of certain intermediate products of Q3 and opportunity due to Covid-19 could support HPCL’s GRMs sequentially. Every Rs 0.5/ltr increase in autofuel margins would raise EPS by Rs 7.7/share. HPCL is well placed to benefit from higher marketing earnings. Lower oil should also help working capital release.

Key risks are adverse petroleum prices, margins, currency and project issues. At 40% payout, the dividend yield currently is 4%.

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JM Financial upgrades HPCL to BUY from HOLD rating with a revised Target price of Rs 235 from Rs 240. HPCL is their preferred play in the OMC space given its relatively high exposure to the profitable marketing business (accounts for 60% of its EBITDA vs. 30-40% for other OMCs).