Nomura has reduced its target price for Hindustan Petroleum Corporation (HPCL) to Rs 380 from Rs 420, despite a better-than-expected Q2 performance. The brokerage highlights that the era of historically high marketing margins for oil companies is ending, citing rising fuel losses and geopolitical uncertainty. Investors should watch how crude price volatility and marketing margin normalization impact future profitability.
Nomura has lowered its target price for Hindustan Petroleum Corporation (HPCL) to Rs 380 from Rs 420, despite the company reporting a better-than-expected performance in the second quarter. The brokerage has maintained a 'Neutral' rating, reflecting caution regarding the company's long-term earnings trajectory. While HPCL has shown operational progress, analysts warn that the tailwinds that supported the company's stock re-rating between 2023 and 2025—specifically exceptionally high marketing margins—are now fading.
Impact of Marketing Losses and Crude Prices
The primary concern highlighted by Nomura is the normalization of fuel marketing margins. The brokerage estimates that oil marketing companies are currently absorbing losses of approximately Rs 26 per litre on fuel sales. Several factors are contributing to this squeeze on profitability. Crude oil prices are not expected to drop to $65 per barrel in the near term, and the depreciation of the rupee has added a structural cost burden of Rs 3 to Rs 4 per litre on fuel retailing operations. Furthermore, ongoing geopolitical uncertainty in the Middle East continues to pose a risk to the global energy environment.
Operational Updates and Debt Management
Despite the external pressures on margins, HPCL has been focusing on internal efficiency. The company is making strides with the 9 million-tonne-per-annum HRRL refinery, in which it holds a 74% stake. This facility is projected to reach full capacity by December 2026. The company has also made notable progress in its debt profile through refinancing efforts. These actions have successfully reduced the cost of debt by 105 basis points, which is expected to result in annual interest savings of Rs 5 billion starting from the final quarter of 2026.
Another point of interest is the residue upgradation facility at the Vizag refinery. Currently, this project is providing benefits between $0.7 and $1 per barrel to gross refining margins. The company aims to fully implement this by March 2027, with projections indicating an increase in yield to between $2 and $3 per barrel.
Valuation and Peer Comparison
When evaluating the company's valuation, Nomura noted that HPCL is trading at 5.1 times its fiscal 2028 estimated enterprise value to EBITDA. Based on this, the brokerage has expressed a preference for peers like Indian Oil Corporation and Bharat Petroleum Corporation, which carry 'Buy' ratings within its coverage. For shareholders, the most relevant details to follow will be the actual utilization levels of the new refinery capacity and whether the company can defend its profitability if fuel marketing losses persist in the coming quarters.