HPCL, BPCL, IOC may see further upside despite re-rating, says HSBC

Brokerage firm HSBC has further raised price targets on India's state-run oil refiners - Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL) and Indian Oil Corporation Ltd. (IOC). The brokerage believes that despite having re-rated, these stocks still have more room on the upside.

HSBC has maintained its "buy" recommendation on all three Oil Marketing Companies (OMCs), while raising its price target on HPCL to ₹630 from ₹375. It also expects shares of BPCL to rise to as high as ₹860.

The revised price targets imply a potential upside ranging between 23% for HPCL and 42% each for both BPCL and Indian Oil, when compared to Thursday's closing price.

HSBC was among the first on the street that had upgraded these OMCs in November last year. It had upgraded their rating to "buy" on all three companies from its earlier rating of "hold." It had also revised its price targets to levels before the current revision.

The brokerage had cited prospects of better earnings as the reason behind their upgrade. Since then, shares of HPCL have risen 52%, BPCL are up 45%, while those of Indian Oil have risen 56%.

For the near-term, HSBC expects rangebound oil prices to support the profitability of these OMCs and the medium-term to be supported by refinery upgrades.

It has revised its valuation multiples higher to reflect reduced government intervention, tacit support and improved fundamentals.

Courtesy of this recent run-up, the street is divided on the extremes when it comes to judging these companies and their prospects going forward.

In another separate note today, BoFA Securities said that valuations of these companies remain expectations. It has an "underperform" rating on both HPCL and BPCL, while Indian Oil commands a "neutral" rating.

Nuvama was also of the opinion that the earnings for these companies will recede from record levels as and when GRMs normalise.

Shares of HPCL, BPCL and Indian Oil are trading with gains of 3% each on Friday.