Why analysts are bullish on HPCL

Hindustan Petroleum Corporation Limited (HPCL) has reported a jump in its net profit during the first quarter of 2020-21 despite a 38% fall in revenues and reduction in refining margin. Higher profit from its marketing division is the first reason for this feat. Inventory gains of Rs 630 crore which includes Rs 200 crore from refining division and Rs 430 from marketing division, is another factor that boosted the net profit.HPCL also fared reasonably on the operational front. Its LPG volume was 114% of the pre-Covid levels in the first quarter; mostly because of the increased consumption triggered by the lockdown. HPCL was also able to perform better in the lubricant oil segment since its volume fall was restricted to only 15% as compared to 30% in the industry. The company is expected to report better numbers in the coming quarter as the demand for petrol and diesel is also expected to reach around 90% of the pre-Covid levels soon with the ongoing unlockdown.Though gross refining margin (GRM) of HPCL was close to zero in the first quarter, it is not a matter of concern as it just reflects the global trend. Experts believe that the global refining cycle is close to its bottom because refining margin hit a 10-year low recently and this low refining margin is not sustainable in the long-term. After an extreme bout of volatility, which took spot crude oil prices to negative territory, the crude oil market has started getting stabilised around $40 per barrel. Stability in the crude oil market is getting reflected in refined products also and this is resulting in improvement in product prices. Global GRMs are expected to improve in the coming quarters with the increasing difference between prices of refined products and crude oil. The spread between HPCL’s GRM and global GRM is also expected to improve in the coming years because the upcoming refinery and upgrading of existing refineries is specifically aimed at increasing the share of high margin products.With a high marketing share from metros, this integrated refining and marketing player is better placed on the marketing front as well. This gives HPCL the advantage of higher margins, higher growth rate, and lower competition and makes it the best player to benefit from benign crude oil prices prevailing now.Cheap valuation, a high dividend yield of 4.68% and PE of 7.91 times, is yet another factor attracting analysts to this counter now. They believe that a re-rating of the company is possible, once its Barmer refinery goes operational in 2023. 77818876 77818879Selection MethodologyWe pick up the stock that has shown the maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.Graphics by Abdul Shafiq/ET Prime

from Economic Times https://ift.tt/2QRlCzH