It's never a good idea to recommend an oil marketing stock, when crude prices are climbing. However, diesel and petrol prices are now aligned to market rates, which does not impact stocks like HPCL too much.
Of course, if the government asks oil marketing companies like HPCL, BPCL or Indian Oil to absorb the crude hike, our recommendation could go haywire.
Assuming that it does not, the shares of Hindustan Petroleum are an excellent bet at the current prices. The shares are now at a 52-week low of Rs 252.20, which makes the shares attractive.
The company over the last five years has seen its net profits surge from Rs 1,100 crores in FY 2014 to Rs 7,128 crores in FY 2018. Last year the company rewarded shareholders with a solid bonus of 1:2 and dividends, which takes the dividend yield to as high as 8 per cent.
HPCL has the second largest pipleline in the country and is the largest lube manufacturer. There are reports that HPCL may takeover MRPL, which if it happens, will make the company the second largest refiner after IOC.
Solid expansion plans
HPCL has lined-up some massive expansion plans to spend around Rs 75,000 crores over the next 5 years. This would include capacity addition at Mumbai and Vizag, expansion of gas pipeline network and a 5 mmtpa liquified natural gas regasification terminal coming up at the Chhara port in Gujarat.
The company has also been rewarding shareholders with solid dividends and bonus issue in the past few years and there is reason to believe that the same would continue.
There are concerns, that rising crude prices, pose a threat. At the moment, petrol and diesel prices are de-regulated, which deflects any concern, but, if the government intervenes, than it could pose a problem. There are also worries that electric vehicles, may lower the demand for petrol and diesel vehicles. At least for the next 5-10 years, we see little room for worry, with petrol and diesel vehicles likely to continue to grow at a franctic pace, given how expensive electric vehicles are.
Cheap on valuations
HPCL is also very cheap on valuations. The stock at Rs 255, is trading at just 5.4 times, the 2018 EPS of 47.2. This is really low for a company that has a solid retail network. The HPCL stock is a good bet at the current market price of Rs 255. Investors may buy and hold the shares for the long term.