Strong Q4, Weaker Q1? ICICI Securities sees over 30% upside in HPCL shares; here's why

Dalal Street is all set to kick start the earnings season for the quarter ended March 2024 today. Tata Consultancy Services Ltd (TCS), the largest domestic software exporter, will announce its earnings on Friday.

In its recent report about the Q4 preview of HPCL stock, ICICI Securities has maintained a 'Buy' rating with a revised target price of Rs 635 (earlier Rs 625). 

Given the improvement in GRMs, recovery in marketing margins, Rajasthan and Vizag refineries coming onstream over FY24-FY25, we believe current valuations of just 4.5x FY26E P/E and 5.3x FY26E EV/EBITDA are favourable, it said.

"Q4FY24 may exceed our estimates for HPCL, driven by stronger GRM guidance and better-than-expected marketing margins; however, macros have changed dramatically. Crude prices have spiked to USD 90/bbl+, with a price reduction of Rs 2/ltr in petrol/diesel in mid-Mar’24, which can keep retail fuel margins subdued over the next 3 months," ICICI Securities said.

According to the brokerage firm, the spike in crude prices has not yet been reflected in GRMs. It has adjusted FY25E EPS to factor in some moderation in margins and believes the stock may remain range-bound over the next 3-4 months.

"However, our core thesis on HPCL remains intact, with a material increase in refining capacity, the addition of petrochemical volumes and normalisation of marketing margins to deliver superior and predictable earnings growth over FY24-26E," it said.

The reasons for the positive stance on HPCL are also based on structural long-term factors such as material expansion in available refining capacity, materially altering the earnings mix, addition of petchem volumes of 2.5-2.6mt by the end of FY26E, improving return ratios and leverage as a result of stronger cash flow and operating earnings.