{"id":8090,"date":"2022-04-13T15:24:12","date_gmt":"2022-04-13T09:54:12","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=8090"},"modified":"2022-05-02T16:41:58","modified_gmt":"2022-05-02T11:11:58","slug":"hpcl-unfolding-opportunity-in-crisis","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/hpcl-unfolding-opportunity-in-crisis\/","title":{"rendered":"Expert View on HPCL \u2013 Unfolding Opportunity in Crisis"},"content":{"rendered":"\n<p><em>Kushank is an avid investor and SEBI-registered investment advisor. He is an alumnus of IIT KGP and has worked with JP Morgan, Ambit capital. He runs a <a href=\"https:\/\/www.smallcase.com\/manager\/kushankpoddar?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=kuspod\" target=\"_blank\" rel=\"noreferrer noopener\">smallcase<\/a> called \u2013 Value and Momentum Picks consisting of a mix of <a href=\"https:\/\/www.tickertape.in\/blog\/most-undervalued-stocks-in-india\/\">undervalued stocks<\/a> and ones that have a good <a href=\"https:\/\/www.tickertape.in\/blog\/foray-into-companies-experiencing-price-momentum-backed-by-quality-growth\/\">price momentum<\/a> going for them.<\/em><\/p>\n\n\n\n<p>I like to keep an eye on ups and downs of the markets and see \u201cvalue\u201d investment opportunities as they arise. One such opportunity that is looking good to me after careful analysis at the moment is <a href=\"https:\/\/www.tickertape.in\/stocks\/hindustan-petroleum-corp-HPCL?checklist=basic&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=kuspod\" target=\"_blank\" rel=\"noreferrer noopener\">HPCL<\/a> (Hindustan Petroleum Corporation Limited).<\/p>\n\n\n\n<p>In this article, I will share the rationale behind this view.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/hpcl-unfolding-opportunity-in-crisis\/#Everyone-hates-HPCL-%E2%80%93-I-get-it\" title=\"Everyone hates HPCL &#8211; I get it\">Everyone hates HPCL &#8211; I get it<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/hpcl-unfolding-opportunity-in-crisis\/#But-there-are-big-positives-in-the-story\" title=\"But there are big positives in the story\">But there are big positives in the story<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/hpcl-unfolding-opportunity-in-crisis\/#The-macro-story-%E2%80%93-India-needs-petroleum\" title=\"The macro story &#8211; India needs petroleum\">The macro story &#8211; India needs petroleum<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/hpcl-unfolding-opportunity-in-crisis\/#EV-adoptions-trajectory-may-not-be-that-fast\" title=\"EV adoption\u2019s trajectory may not be that fast\">EV adoption\u2019s trajectory may not be that fast<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/hpcl-unfolding-opportunity-in-crisis\/#HPCL-will-survive-even-in-100-EV-world\" title=\"HPCL will survive even in 100% EV world\">HPCL will survive even in 100% EV world<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/hpcl-unfolding-opportunity-in-crisis\/#HPCLs-business-is-in-an-upward-trajectory\" title=\"HPCL\u2019s business is in an upward trajectory\">HPCL\u2019s business is in an upward trajectory<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/hpcl-unfolding-opportunity-in-crisis\/#Valuation-makes-HPCL-attractive-%E2%80%93-despite-all-negatives\" title=\"Valuation makes HPCL attractive \u2013 despite all negatives\">Valuation makes HPCL attractive \u2013 despite all negatives<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/hpcl-unfolding-opportunity-in-crisis\/#Timing-looks-good\" title=\"Timing looks good\">Timing looks good<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Everyone-hates-HPCL-%E2%80%93-I-get-it\"><\/span><strong>Everyone hates HPCL &#8211; I get it<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>When you think about it, HPCL doesn\u2019t look like a great business because of the following three reasons &#8211;<\/p>\n\n\n\n<ul><li><strong>Disruption<\/strong> &#8211; <a href=\"https:\/\/www.tickertape.in\/blog\/will-india-welcome-electric-vehicles\/\">Electric vehicles<\/a> (<a href=\"https:\/\/blog.tickertape.in\/will-india-welcome-electric-vehicles\/?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=kuspod\" rel=\"nofollow noopener\" target=\"_blank\">EV<\/a>) are the future and will completely disrupt petrol and diesel demand.<\/li><li><strong>Government involvement<\/strong> &#8211; Indian government drives the company\u2019s decision-making, which may not be good for minority <a href=\"https:\/\/www.tickertape.in\/blog\/shareholders\/\">shareholders<\/a>.<\/li><li><strong><a href=\"https:\/\/www.tickertape.in\/blog\/commodity-in-economy\/\">Commodity<\/a> Industry<\/strong> &#8211; Refining crude and selling petrol is a commodity business with no pricing power and long-term compounding.<\/li><\/ul>\n\n\n\n<p>Given these reasons, HPCL doesn\u2019t show up on investors\u2019 stock <a href=\"https:\/\/www.tickertape.in\/screener\/equity?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=kuspod\" target=\"_blank\" rel=\"noreferrer noopener\">screeners<\/a> and watchlists. When I recommended this stock in my <a href=\"https:\/\/www.smallcase.com\/manager\/kushankpoddar?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=kuspod\" target=\"_blank\" rel=\"noreferrer noopener\">smallcase<\/a> as a value pick, the subscribers were sceptical and asked if I was doing the right thing.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"But-there-are-big-positives-in-the-story\"><\/span><strong>But there are big positives in the story<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The points that HPCL is a <a href=\"https:\/\/www.tickertape.in\/blog\/commodity-in-economy\/?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=kuspod\">commodity<\/a> business and is also prone to government involvement are fair. However, I see some factors that support the underlying story, which the market doesn\u2019t appreciate.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The-macro-story-%E2%80%93-India-needs-petroleum\"><\/span><strong>The macro story &#8211; India needs petroleum<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Unlike the western countries, India is a growing country. As the economy grows, more people will have vehicles, they will drive longer distances and will need more fuel. India\u2019s petroleum demand has been a secular growth story. In July 2021, the country\u2019s overall petrol consumption had grown by 5% compared to July 2019 (despite <a href=\"https:\/\/www.tickertape.in\/blog\/effective-money-saving-travel-hacks\/\">travel<\/a> restrictions at that time).<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"638\" height=\"345\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image2.png\" alt=\"\" class=\"wp-image-8091\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image2.png 638w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image2-300x162.png 300w\" sizes=\"(max-width: 638px) 100vw, 638px\" \/><\/figure>\n\n\n\n<p>India\u2019s need for petrol is so much that the Ministry of Petroleum is planning to double the country\u2019s refining capacity by 2030.<br><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"179\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image1-1024x179.png\" alt=\"\" class=\"wp-image-8092\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image1-1024x179.png 1024w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image1-300x52.png 300w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image1.png 1456w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"EV-adoptions-trajectory-may-not-be-that-fast\"><\/span><strong>EV adoption\u2019s trajectory may not be that fast<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>If we look at some of the markets where EVs have gained a higher share &#8211; like Norway and China &#8211; it is because of an active government push through heavy subsidies and other regulations. If we look at the US, only 4% of new vehicles sold in 2021 were EV. India cannot afford heavy subsidies. And experience from the US suggests that the shift to EV will take time.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"HPCL-will-survive-even-in-100-EV-world\"><\/span><strong>HPCL will survive even in 100% EV world<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Also, full EV adoption does not mean companies like HPCL will go out of business. Firstly, HPCL is already working on providing charging infrastructure at its petrol pumps. Also I believe oil marketing companies are well positioned to benefit from EV charging because they already have real-estate at key locations &#8211; which will be an important driver for success.<\/p>\n\n\n\n<p>Secondly, petrol and diesel are not the only products you get from oil refining. The refining process also produces jet fuel, asphalt and a wide range of petrochemicals. So even if no one is using petrol or diesel, we would still need to refine raw <a href=\"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/\">crude oil<\/a> and get jet fuel and petrochemicals for which there is no other alternative.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"HPCLs-business-is-in-an-upward-trajectory\"><\/span><strong>HPCL\u2019s business is in an upward trajectory<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Over the past few years, the company has been investing a lot of money towards increasing its capacity. In the coming years, this capacity will come into operation as seen in the chart below.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"704\" height=\"620\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image3.png\" alt=\"\" class=\"wp-image-8093\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image3.png 704w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image3-300x264.png 300w\" sizes=\"(max-width: 704px) 100vw, 704px\" \/><\/figure>\n\n\n\n<p>Also the global refining margins have been depressed over the past years, but like all commodities this is expected to reverse in the future. This is because of closure of unprofitable refineries due to COVID losses, increased demand as economies reopen and slower addition of capacity due to depressed refining margins of the past. And refining margins are the biggest drivers of profitability for HPCL as can be seen from the chart below.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1004\" height=\"528\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image5.png\" alt=\"\" class=\"wp-image-8094\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image5.png 1004w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image5-300x158.png 300w\" sizes=\"(max-width: 1004px) 100vw, 1004px\" \/><\/figure>\n\n\n\n<p>The company is expected to grow from a period of increasing debt and low margins to that of decreasing debt and high margins.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Valuation-makes-HPCL-attractive-%E2%80%93-despite-all-negatives\"><\/span><strong>Valuation makes HPCL attractive \u2013 despite all negatives<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The stock trades at a normalised <a href=\"https:\/\/www.tickertape.in\/blog\/pe-ratio\/?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=kuspod\">PE<\/a> of 4x, which is quite cheap when compared with peers and its own history.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"952\" height=\"590\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image4.png\" alt=\"\" class=\"wp-image-8095\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image4.png 952w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/image4-300x186.png 300w\" sizes=\"(max-width: 952px) 100vw, 952px\" \/><\/figure>\n\n\n\n<p>Even on the DCF, the stock looks undervalued despite putting in conservative assumptions due to EV adoption.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Timing-looks-good\"><\/span><strong>Timing looks good<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The key part of the thesis \u2013 improvement in refining <a href=\"https:\/\/www.tickertape.in\/blog\/margin-requirements\/\">margin<\/a> \u2013 has played out as expected. However, the stock has come under pressure recently because of government intervention. Following the Ukraine crisis, the oil prices have shot up. But the government hasn\u2019t allowed oil marketing companies to increase fuel prices considering the UP elections. During this period, HPCL incurred losses on fuel sales, which did not go well with the markets.<\/p>\n\n\n\n<p>But now the situation is reversing. Oil prices have come down from $130\/bbl to $100\/bbl currently. At the same time the government has announced a hike in fuel prices and reduced its share of taxes. I expect that in the long term the oil marketing companies will be allowed to recoup the losses made recently \u2013 which will help with investor confidence in the stock.<\/p>\n\n\n\n<p>To conclude, don&#8217;t write off PSUs like HPCL because of narratives around EV destruction, commodity business, government business and other factors. It&#8217;s usually in these ignored areas where you get the best value. Since I added HPCL, it has outperformed <a href=\"https:\/\/www.tickertape.in\/blog\/sensex-companies\/\">Sensex<\/a> by 10% (excluding dividends). I believe there is more juice left here. These are my views on HPCL, but don&#8217;t treat this as an investment recommendation \u2013 please do your own research.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Kushank shares his rationale behind why HPCL (Hindustan Petroleum Corporation Limited), an undervalued stock, has a favourable entry opportunity.<\/p>\n","protected":false},"author":91,"featured_media":8098,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[9,1743],"tags":[1583,1584,605],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/04\/TT-12-April-HPCL-Kushank-BB.jpeg?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/8090"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/91"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=8090"}],"version-history":[{"count":9,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/8090\/revisions"}],"predecessor-version":[{"id":8253,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/8090\/revisions\/8253"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/8098"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=8090"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=8090"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=8090"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}