Nuvama Institutional Equities has issued a ‘Reduce’ recommendation for Hindustan Petroleum Corporation Limited (HPCL), targeting a price of ₹337, which indicates a potential decline of 15% from its current trading price of ₹397. This rating comes in light of HPCL’s disappointing margin performance in Q4 FY25, where the company’s LPG under-recoveries negated any gains made through refining.

Insights on HPCL’s Margin Performance

In the fourth quarter of FY25, HPCL reported an EBITDA (earnings before interest, tax, depreciation, and amortization) of ₹5,800 crore. The company showed a gross refining margin of $8.4 per barrel, outperforming Indian Oil Corporation’s margin of $7.9, but falling short of Bharat Petroleum Corporation Limited’s $9.2. This quarter’s margins were buoyed by a 32% mix of discounted Russian crude, an inventory gain of ₹600 crore, and impressive crude throughput of 6.7 million metric tons, reflecting a 15% year-on-year increase.

LPG Under-Recoveries Impacting Financials

While HPCL enjoyed a robust marketing margin — ₹6 per litre for diesel, up 58% year-on-year, and ₹10 per litre for petrol, with a 41% annual increase — the company faced significant challenges due to LPG under-recoveries amounting to ₹3,300 crore. This situation adversely affected marketing earnings, leading to an overall margin of ₹10,900 crore for FY25. Moreover, HPCL’s domestic volumes grew by 2.6% year-on-year in Q4 FY25, outstripping Bharat Petroleum’s 1.8%, though falling short of Indian Oil’s 2.8%.

Elevated Capital Expenditure on the Horizon

HPCL’s capital expenditure is projected to remain high as the company continues to invest in various sectors, even as major projects approach completion. The Residue Upgradation Facility at the Vizag refinery is expected to commence operations in Q2 FY26, while the Barmer refinery is slated to start production in October 2025. Additionally, the petchem unit is anticipated to be operational by January 2026. The management has set a capex guidance of ₹13,000-₹14,000 crore for FY26/27, which could pressure return ratios.

Future Outlook for HPCL

Despite the current hurdles, Nuvama suggests that the bottom-upgradation at the Barmer refinery could yield an additional $3-$4 per barrel to gross refining margins, with the full benefits expected by FY27. When fully operational, the Barmer refinery’s gross refining margin is estimated to reach $20 per barrel.

Conclusion

In summary, HPCL faced a challenging environment in FY25, with its EBITDA dropping by 34% year-on-year and net profit declining by 51% due to unfavorable refining margins and LPG under-recoveries. Furthermore, the anticipated capital expenditure of ₹14,000 crore — significantly above the usual ₹9,000-₹10,000 crore range — raises concerns about return ratios, leading Nuvama to deem the risk-reward scenario as unfavorable for investors.

For those interested in HPCL’s future performance, staying updated on market dynamics and company announcements will be crucial.