Hindustan Petroleum marketing losses offset by Rajasthan refinery ramp-up potential

Investment View and 1QFY27 Performance

Motilal Oswal Financial Services Limited retains a BUY rating on Hindustan Petroleum Corporation Limited (HPCL), while describing the near-term marketing outlook as challenging. HPCL reported a 1QFY27 operating loss of Rs 16,130 crore, 37 per cent worse than the broker’s estimated loss of Rs 11,700 crore. The main reason was a gross marketing margin, including inventory, of negative Rs 14.9 per litre versus the estimated negative Rs 9.4 per litre.

Loss after tax was Rs 11,530 crore, compared with the estimated loss of Rs 9,900 crore. In contrast, reported gross refining margin, excluding the impact of Special Additional Excise Duty, was US$23.8 per barrel, 33 per cent above the broker’s estimate.

Operating Volumes and LPG Under-Recovery

Operational volumes broadly met expectations. Refining throughput was 6.5 million metric tonnes and marketing volume, including exports, was 13.1 million metric tonnes. HPCL’s refineries processed 6.52 million metric tonnes at 107 per cent of capacity, comprising 3.97 million metric tonnes at the Visakh refinery and 2.55 million metric tonnes at the Mumbai refinery.

Marketing sales increased 0.6 per cent year on year to 13.12 million metric tonnes. Petrol and diesel sales rose 8.1 per cent to 8.8 million metric tonnes. However, domestic LPG under-recovery increased sharply to Rs 5,590 crore in 1QFY27 from Rs 1,340 crore in 4QFY26. The cumulative negative LPG under-recovery buffer stood at Rs 16,400 crore as of June 2026.

Supply, Inventory and Management Commentary

Management stated that crude supply was adequately covered through the end of August 2026. LPG procurement had become more resilient through diversification beyond the Middle East, with management identifying price volatility, rather than physical availability, as the principal risk.

HPCL carried higher inventory as of June 30, 2026 and incurred inventory losses. Its bottom-upgradation unit also experienced technical issues. Domestic LPG loss was about Rs 510 per cylinder in 1QFY27, about Rs 680 per cylinder in June 2026 and about Rs 490 per cylinder in July 2026, compared with about Rs 80 per cylinder in 4QFY26.

Rajasthan Refinery Ramp-Up: Key Catalyst

The broker’s key positive catalyst is the ramp-up of HPCL Rajasthan Refinery Limited (HRRL). Commercial operations began on June 22, 2026, and the crude distillation unit was operating at 60 per cent utilisation.

Management expects Rajasthan refinery utilisation to reach about 50 per cent in 2QFY27, 80-85 per cent in 3QFY27 and near-full refining utilisation in 4QFY27. The petrochemicals section is expected to ramp up more gradually by FY27-end.

Higher internal and joint-venture supply should substantially reduce third-party fuel purchases and support marketing earnings. HPCL expects to be largely self-sufficient in fuels, with surplus in some products, by FY27-end. Retail 2.0 upgrades across 4,900 outlets have delivered like-for-like volume growth 100-150 basis points above the market.

Earnings Outlook

Motilal Oswal models marketing margins of Rs 4.5 per litre for both petrol and diesel in 2HFY27-FY28. It forecasts a consolidated EBITDA of Rs 3,500 crore and a loss after tax of Rs 4,000 crore for FY27E, followed by EBITDA of Rs 25,300 crore and profit after tax of Rs 11,200 crore for FY28E.

Valuation and Target Price

Motilal Oswal’s sum-of-the-parts valuation results in a target price of Rs 470 per share. The valuation uses six times HPCL standalone December 2027E EBITDA, values MRPL at a 25 per cent discount to its current market price, HMEL at six times FY24 profit after tax, Chhara Terminal at 0.5 times book value and HRRL at 0.8 times equity invested.

Risks and Strategic Initiatives

• High LPG losses and continued domestic LPG under-recovery.
• Crude prices of US$90-100 per barrel amid geopolitical tensions.
• High product cracks and the potential for higher Special Additional Excise Duty.
• Elevated debt, which management reported at about Rs 72,000 crore, although it aims to deleverage.
• Technical issues and execution risks during the ramp-up of the Rajasthan refinery and related petrochemical operations.

HPCL’s FY27 capex guidance is Rs 9,700 crore. The Samriddhi 2.0 programme targets Rs 1,500 crore of EBITDA gains, including Rs 1,000 crore of accrual in FY27.