Oil And Gas Stocks To 'Buy': Motilal Oswal Bets On HPCL, GAIL As It Top Pick — Here's Why

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Motilal Oswal Report

Hindustan Petroleum Corporation Ltd. remains our preferred pick among the three oil marketing companies. We model a marketing margin of Rs 3.3/lit for both motor spirit and high speed diesel in FY26/FY27, while the current MS and HSD marketing margins are Rs 9.1/lit and Rs 6.6/lit, respectively.

We view the following as key catalysts for the stock:

1. the de-merger and potential listing of the lubricant business,

2. the commissioning of its bottom-upgrade unit in Q4 FY25,

3. the start of its Rajasthan refinery in CY25, and

4. LPG underrecovery compensation.

HPCL currently trades at 1.3x FY26E P/B, which we believe offers a reasonable margin of safety as we estimate FY26E RoE of 17.3%.

Our SoTP-based target price includes:

1. The standalone refining and marketing business at 6.5x Dec'26E Ebitda.

2. Rs 38/share as potential value unlocking from the de-merger of the lubricant business.

3. HMEL at 8x P/E is based on its FY24 PAT (HPCL’s share), deriving a value of Rs 35/share.

4. Chhara Terminal at 1x P/B and HPCL’s HRRL stake at 0.5x of HPCL’s equity investment in the project to date; MRPL’s stake is valued at our target price.

5. All these lead to a revised target price of Rs 490. Reiterate Buy.

GAIL: We reiterate our Buy rating on GAIL with a target price of Rs 255. During FY24-27, we estimate a 15% CAGR in PAT driven by:

1. an increase in natural gas transmission volumes to 154 mmscmd in FY27 from 120 mmscmd in FY24;

2. substantial improvement in petchem segment’s profitability over H2 FY25- FY27 as the new petchem capacity will be operational and spreads are bottoming out;

3. healthy trading segment’s profitability with guided Ebit of at least Rs 45 billion.

We expect GAIL’s RoE to improve to ~16% in FY26 from 9.5% in FY23, with a healthy FCF generation of Rs 81 billion in FY26 (versus -Rs 45.3 billion in FY23), which we believe can support its valuations.

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