India's Clean Mobility Shift Will Crush Traditional Fuel Revenues

Key Takeaways

• Transition to clean mobility and stricter environmental regulations threaten HPCL's core fuel sales, profitability, and earnings sustainability.
  
• Rising ESG pressures, funding constraints, and increased competition will limit HPCL's growth prospects and market position.
  
• Strategic upgrades, cost-saving initiatives, diversification into clean energy, and favorable industry trends are expected to boost operational efficiency, profitability, and long-term financial strength.

Catalysts

Engages in the refining and marketing of petroleum products in India and internationally.

• The accelerating adoption of electric vehicles in India, combined with increasingly stringent government mandates for clean mobility, is poised to cause a secular, structural decline in gasoline and diesel demand. This will erode HPCL's core fuel sales volumes and severely limit their ability to grow topline revenue in the coming years.
  
• With the global and domestic push towards enforcing carbon pricing and imposing higher carbon taxes, HPCL is likely to face steadily rising operating costs, which, coupled with tightening environmental regulations, will compress refining and marketing profitability over the long term and put persistent downward pressure on net margins and overall earnings.
  
• Growing ESG concerns and sustained divestment by global investors from fossil-fuel-based companies are expected to significantly increase HPCL's cost of capital, limit future access to cheap funding, and potentially drive valuation discounts, which will negatively affect shareholder returns and the company's ability to fund growth projects out of internally-generated cash flows.
  
• Intensifying competition from nimble, tech-enabled private sector refiners and global energy giants, especially as the energy transition attracts new entrants and accelerates innovation, is set to erode HPCL's domestic market share and pricing power, further impacting volume growth and putting chronic pressure on net profit growth.
  
• Persistent risk of overcapacity in the Indian refining sector and across Asia, exacerbated by continued brownfield expansions and new entrants, will drive sustained margin compression for HPCL as excess supply overwhelms demand growth, diminishing both refining earnings and returns on decades-long capital investments.

Hindustan Petroleum Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hindustan Petroleum compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hindustan Petroleum's revenue will decrease by 4.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 2.4% today to 1.8% in 3 years time.
• The bearish analysts expect earnings to reach ₹66.0 billion (and earnings per share of ₹30.94) by about August 2028, down from ₹102.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, up from 8.5x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 17.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.51%, as per the Simply Wall St company report.

Hindustan Petroleum Future Earnings Per Share Growth

Risks

• Significant capacity expansions and modernization at both Vizag and Barmer refineries, including the adoption of complex technologies and integration with petrochemicals, are likely to enhance both operational efficiencies and gross refining margins, thereby supporting long-term improvements in earnings and net margins.
  
• Successful execution of the Samriddhi operational excellence initiative and Abhyuday retail throughput program are already contributing to substantial cost savings and EBITDA uplift, with further room to drive recurring margin improvements and support profits.
  
• Ongoing deleveraging efforts, combined with the pending government LPG under-recovery compensation, may reduce debt-related interest outflows, strengthening the balance sheet and improving net profits and overall financial resilience.
  
• Expansion into gas (including LNG terminal at Chhara), CNG retailing, and clean energy (green hydrogen, renewables, ethanol blending), shows HPCL's active move toward energy transition, potentially diversifying and stabilizing future revenues even as traditional fuel cycles evolve.
  
• Strong underlying secular trends such as India's growth in energy demand, urbanization, infrastructure buildout, and rising vehicle penetration provide a powerful and durable tailwind for volume and revenue growth for large refined product suppliers like HPCL.

Valuation

• The assumed bearish price target for Hindustan Petroleum is ₹285.04, which represents two standard deviations below the consensus price target of ₹446.55. This valuation is based on what can be assumed as the expectations of Hindustan Petroleum's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹618.0, and the most bearish reporting a price target of just ₹210.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹3712.5 billion, earnings will come to ₹66.0 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 14.5%.
  
• Given the current share price of ₹409.5, the bearish analyst price target of ₹285.04 is 43.7% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.