HINDPETRO

HRRL or Barmer refinery, in which HPCL has 74% stake, has witnessed cost escalation from Rs431bn projected in FY18 to Rs718bn currently. The project with 9mmtpa of refining capacity and 2.4mmtpa of petrochemicals is likely to throw poor ROCE of ~3% due to high depreciation and interest burden thereof. Additionally, Brent appears to be rising, which means gross marketing margins on auto fuels have peaked. Threat of further hike in excise duty on auto fuel also remains. Structurally, the high marketing leverage that HPCL used to enjoy vis-à-vis refining, is likely to decline with rising refining capacity. There is no inclination on compensation of LPG under-recoveries. The stock trades at 1.4x FY26 PBV, much higher than long term one-year forward average of 1.1x, including the period of FY15-18, the era which witnessed no pricing intervention in auto fuels. We value the stock at 1x FY27 PBV and reiterate our Sell recommendation for the stock. Sustained low Brent remains the biggest risk to our recommendation. Outlook We value the company at Rs321, valuing it at 1x FY27 PBV. We reiterate our Sell rating on the stock. Key risk to our recommendation is sustained low Brent oil price