Whalesbook
HPCL Shares Face Pressure After JPMorgan Downgrade
Hindustan Petroleum Corporation Ltd. (HPCL) shares tumbled Tuesday, January 20, as JPMorgan downgraded the state-run oil marketing company (OMC) to 'Neutral.' The brokerage cited valuation constraints and potential near-term earnings risks as key concerns, while maintaining an 'Overweight' stance on peers Bharat Petroleum Corporation Ltd. (BPCL) and Indian Oil Corporation Ltd. (IOCL).
Valuation and Earnings Headwinds
JPMorgan highlighted limited upside potential for HPCL due to elevated balance sheet leverage. The commissioning of the new Rajasthan refinery was also flagged as a factor contributing to potential earnings headwinds. This downgrade comes after a strong run for OMC stocks.
Sector Rally Under Scrutiny
Over the past year, HPCL, BPCL, and IOCL have significantly outperformed the Nifty, with gains ranging between 23% and 30% compared to the benchmark's approximate 10% rise. This rally was fueled by robust earnings upgrades. However, JPMorgan suggests that sustaining this momentum hinges on future earnings revisions, particularly for FY27 estimates.
Excise Duty Uncertainty Looms
A critical factor for future upside remains the clarity on excise duties. JPMorgan noted that a ₹2 per litre increase in fuel taxes by next year could pose a downside risk to FY27 earnings. Conversely, if such an increase does not materialize, estimates could be revised higher. The brokerage believes making a strong case for positive FY27 revisions is challenging without clear visibility on this front.
Government Revenue and Tax Options
The brokerage pointed out that central government revenue collections have been tracking below budget, increasing the likelihood of fund mobilization through higher excise duties. Raising taxes on petrol and diesel is a potential option, with each ₹2 per litre increase estimated to generate approximately ₹34,000 crore in additional revenue. While fuel taxes were last raised on April 8, 2025, and the Union Budget is set for February 1, 2026, the timing of any announcement remains uncertain.
Path Forward for OMC Stocks
JPMorgan suggests that further upside for OMC stocks now depends on either a sharp, sustained decline in crude oil prices or definitive visibility on excise duty policy. With tax policy clarity unlikely in the near term, the recent rally in OMC shares might face a pause. The brokerage estimates that a $1 per barrel change in average FY27 crude oil prices could impact OMC EBITDA by around 7%. Clarity on excise duties is anticipated only a few months into FY27, making near-term performance subject to market sentiment and crude price movements.