The quarter witnessed sequential profit moderation of 6.12% from Q1 FY26's ₹4,110.93 crores, but the year-on-year comparison reveals a dramatic recovery from the exceptionally weak base of the previous year when the company struggled with compressed refining margins. Operating margins expanded to 6.83% in Q2 FY26, significantly ahead of the 2.70% recorded in the corresponding quarter last year, underscoring improved refining economics and better product realisations.
The Navratna PSU, majority-owned by Oil and Natural Gas Corporation Limited (54.90% stake), has demonstrated resilience in navigating volatile crude oil markets and refining margins. With operations spanning refining, marketing, and pipeline infrastructure, HPCL's performance reflects both improved operational efficiency and favourable market conditions that have supported downstream oil companies in recent quarters.
Financial Performance: Margin Expansion Drives Profitability
HPCL's Q2 FY26 financial performance showcases a significant improvement in profitability metrics, despite marginal revenue growth. Net sales stood at ₹1,00,855.60 crores, registering modest year-on-year growth of 0.90% from ₹99,957.23 crores in Q2 FY25. However, the sequential comparison reveals a 9.00% decline from Q1 FY26's ₹1,10,825.33 crores, reflecting typical seasonal variations in petroleum product demand and pricing dynamics.
The company's operating profit excluding other income surged to ₹6,852.18 crores in Q2 FY26, more than doubling from ₹2,688.01 crores in the year-ago quarter. This translated into an operating margin of 6.83%, a substantial expansion of 413 basis points year-on-year. The margin improvement was driven by better gross refining margins (GRMs), improved product mix, and operational efficiencies across the company's refining complex.
Profit before tax reached ₹5,130.91 crores in Q2 FY26, compared to a meagre ₹348.19 crores in Q2 FY25, representing a fourteen-fold increase. The PAT margin expanded to 3.85% from 0.14% year-on-year, reflecting the dramatic turnaround in profitability. Interest costs remained relatively stable at ₹824.17 crores, whilst depreciation stood at ₹1,612.21 crores, in line with the company's ongoing capital expenditure programme for refinery upgrades and capacity expansion.
| Quarter | Net Sales (₹ Cr) | QoQ Change | Net Profit (₹ Cr) | YoY Change | Operating Margin |
|---|---|---|---|---|---|
| Sep'25 | 1,00,856 | -9.00% | 3,859 | +2,605% | 6.83% |
| Jun'25 | 1,10,825 | +1.09% | 4,111 | +548% | 6.87% |
| Mar'25 | 1,09,633 | -0.88% | 3,415 | +26.06% | 5.31% |
| Dec'24 | 1,10,608 | +10.66% | 2,544 | — | 5.41% |
| Sep'24 | 99,957 | -12.23% | 143 | — | 2.70% |
| Jun'24 | 1,13,888 | -0.69% | 634 | — | 1.84% |
| Mar'24 | 1,14,678 | — | 2,709 | — | 4.28% |
The quality of earnings improved significantly, with other income contributing ₹522.32 crores—a relatively modest portion of the total operating profit. The tax rate normalised to 24.78% in Q2 FY26 from an abnormally high 59.03% in the year-ago quarter, reflecting the return to profitability and standard tax provisions.
Operational Excellence: Capital Efficiency Drives Value Creation
HPCL's operational metrics reveal a company operating with improved capital efficiency and robust return ratios. The company's return on equity (ROE) stands at an impressive 18.58% on an average basis, significantly outperforming most peers in the oil refining and marketing sector. This elevated ROE reflects HPCL's ability to generate substantial returns on shareholder capital, a critical metric for evaluating management's effectiveness in deploying resources.
The company's return on capital employed (ROCE) of 8.80% for the latest period, whilst lower than ROE due to the inclusion of debt capital, demonstrates reasonable efficiency in utilising total capital. The five-year EBIT growth rate of 26.09% significantly outpaces the sales growth of 12.82%, indicating expanding profitability and improving operational leverage as the company benefits from scale and efficiency improvements.
Strong Capital Efficiency Metrics
HPCL's ROE of 18.58% positions it amongst the best performers in the oil sector, reflecting superior capital allocation and profitability. The company's ability to generate ₹3.75 of sales for every rupee of capital employed demonstrates efficient asset utilisation. With debt-to-EBITDA at a manageable 1.19x and EBIT-to-interest coverage of 3.30x, the company maintains a balanced capital structure whilst pursuing growth investments in refining capacity and retail infrastructure.
The balance sheet reveals a company with substantial scale and ongoing capital investment. Total shareholder funds stood at ₹51,144.29 crores as of March 2025, up from ₹46,921.35 crores in the previous year. Long-term debt remained stable at ₹46,175.55 crores, resulting in a net debt-to-equity ratio of 1.31x—elevated but typical for capital-intensive refining operations. Fixed assets increased to ₹86,179.20 crores, reflecting continued investment in refinery upgrades and expansion projects.
Working capital management showed pressure with current liabilities rising to ₹96,277.72 crores, driven primarily by higher trade payables of ₹29,800.80 crores. However, current assets also expanded to ₹57,704.84 crores, providing adequate liquidity to support operations. The company's cash flow from operations reached ₹14,227.00 crores for FY25, demonstrating strong cash generation capability despite negative closing cash positions that reflect the typical working capital intensity of the petroleum business.
Refining Margin Dynamics: The Key Driver of Performance
The dramatic improvement in HPCL's profitability stems primarily from the recovery in gross refining margins, which had been severely compressed throughout much of FY25. The company operates refining capacity across multiple locations with a combined crude processing capability that positions it as one of India's major refiners. The operating margin expansion from 2.70% in Q2 FY25 to 6.83% in Q2 FY26 reflects both improved benchmark GRMs and better product yields.
Global refining margins strengthened during the quarter due to tighter product supply-demand dynamics, particularly for middle distillates and gasoline. HPCL benefited from this favourable environment, with its complex refinery configuration enabling optimisation of product slate based on market conditions. The company's ability to process heavier crude grades and produce higher-value products provided additional margin advantages.
| Period | Operating Margin (Excl OI) | PAT Margin | Net Profit (₹ Cr) |
|---|---|---|---|
| Q2 FY26 | 6.83% | 3.85% | 3,859 |
| Q1 FY26 | 6.87% | 3.73% | 4,111 |
| Q4 FY25 | 5.31% | 3.13% | 3,415 |
| Q3 FY25 | 5.41% | 2.31% | 2,544 |
| Q2 FY25 | 2.70% | 0.14% | 143 |
| Q1 FY25 | 1.84% | 0.56% | 634 |
Marketing margins also contributed positively, with the company's extensive retail network of fuel stations providing stable volumes and improved realisations. HPCL's marketing infrastructure, including pipelines and storage facilities, offers integrated value chain benefits that enhance overall profitability beyond pure refining economics.
Margin Sustainability Remains Key Monitoring Point
Whilst current refining margins remain healthy, the cyclical nature of the refining business necessitates caution. Global refining capacity additions, particularly in Asia and the Middle East, could pressure margins in coming quarters. Additionally, crude oil price volatility and inventory gains/losses can create earnings variability. Investors should monitor GRM trends and management commentary on margin outlook closely, as sustained profitability depends heavily on favourable refining economics continuing.
Industry Leadership: How HPCL Compares to Peers
Within the Indian oil refining and marketing sector, HPCL occupies a significant position alongside larger peers like Reliance Industries, Indian Oil Corporation, and Bharat Petroleum. The peer comparison reveals HPCL's competitive strengths in profitability metrics whilst highlighting valuation differences that reflect varying business models and market perceptions.
| Company | P/E (TTM) | P/BV | ROE (%) | Debt/Equity | Div Yield (%) |
|---|---|---|---|---|---|
| HPCL | 9.76 | 1.95 | 18.58 | 1.31 | 2.24 |
| Reliance Industries | 24.49 | 0.23 | 6.74 | -0.11 | 0.37 |
| ONGC | 8.90 | 0.94 | 13.20 | -0.09 | 4.89 |
| Indian Oil Corp | 9.46 | 0.12 | 12.50 | 0.40 | 1.84 |
| BPCL | 8.60 | 1.86 | 20.00 | 0.58 | 2.87 |
| Oil India | 10.43 | 1.38 | 16.58 | 0.44 | 2.73 |
HPCL's ROE of 18.58% stands out as the second-highest amongst the peer group, trailing only BPCL's 20.00% and significantly ahead of the sector average. This superior return profile reflects efficient operations and strong profitability relative to equity capital employed. The company's P/E ratio of 9.76x sits in the middle of the range, appearing reasonable given the strong ROE and recent earnings momentum.
However, HPCL trades at a premium price-to-book value of 1.95x compared to most peers, which typically trade below or around book value. This premium reflects market recognition of the company's improving profitability trajectory and quality of earnings. The debt-to-equity ratio of 1.31x is higher than most peers except for integrated players, reflecting the capital intensity of refining operations and ongoing expansion investments.
The dividend yield of 2.24%, based on the latest dividend of ₹10.50 per share, provides moderate income whilst the payout ratio of 33.18% leaves room for dividend growth as profitability improves. HPCL's market capitalisation of approximately ₹99,976 crores positions it as the fifth-largest amongst the peer group, reflecting its significant but not dominant market position.
Valuation Analysis: Attractive Entry Point Despite Recent Rally
HPCL's current valuation presents a compelling case for investors seeking exposure to the improving refining cycle. Trading at a P/E ratio of 9.76x based on trailing twelve-month earnings, the stock appears reasonably priced relative to both historical averages and peer multiples. The broader oil sector trades at an average P/E of approximately 16x, suggesting HPCL offers a valuation discount despite its superior ROE profile.
The price-to-book value of 1.95x represents a premium to tangible book value but remains justified given the company's ROE of 18.58%—well above the cost of equity for most investors. The enterprise value-to-EBITDA multiple of 7.57x appears attractive for a capital-intensive business with improving cash generation. The EV-to-capital employed ratio of 1.41x suggests the market values the company's asset base at a reasonable premium, reflecting expectations of continued value creation.
The stock has delivered impressive returns of 25.48% over the past year, significantly outperforming the Sensex return of 5.77% by nearly 20 percentage points. The three-year return of 238.91% demonstrates the substantial wealth creation for long-term holders, though much of this reflects recovery from depressed levels during the COVID-19 pandemic and subsequent margin compression period.
At the current price of ₹469.85, the stock trades just 1.50% below its 52-week high of ₹477.00, suggesting momentum remains strong. However, the PEG ratio of 2.93x indicates the valuation is somewhat elevated relative to the five-year earnings growth rate, warranting caution about near-term upside potential. The proprietary Mojo score of 78/100 with a "BUY" rating reflects the balanced assessment of attractive valuation, good quality fundamentals, and positive near-term trends.
"With refining margins normalising and operational efficiency improving, HPCL offers investors exposure to India's growing energy demand at a reasonable valuation, though margin sustainability remains the key variable."
Shareholding: Institutional Confidence Building
The shareholding pattern reveals stable promoter holding with gradually increasing institutional participation. Oil and Natural Gas Corporation Limited maintains its 54.90% stake, providing strategic stability and access to upstream integration benefits. The promoter holding has remained unchanged across recent quarters, reflecting ONGC's long-term commitment to the investment.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 54.90% | 54.90% | 54.90% | 0.00% |
| FII | 14.48% | 13.55% | 12.55% | +0.93% |
| Mutual Funds | 18.46% | 18.74% | 18.69% | -0.28% |
| Insurance | 3.19% | 3.87% | 4.19% | -0.68% |
| Other DII | 0.59% | 0.56% | 0.70% | +0.03% |
| Non-Institutional | 8.37% | 8.38% | 8.98% | -0.01% |
Foreign institutional investors increased their stake to 14.48% in Q2 FY26 from 13.55% in the previous quarter, marking the second consecutive quarter of FII accumulation. This rising foreign interest suggests growing confidence in the company's turnaround story and valuation attractiveness. The presence of 638 FII holders indicates broad-based international interest rather than concentrated positions.
Mutual fund holding of 18.46% represents substantial domestic institutional ownership, though it declined marginally by 0.28% quarter-on-quarter. With 43 mutual funds holding positions, the stock features in numerous diversified and sectoral schemes, providing liquidity and stability. Insurance company holdings decreased to 3.19% from 3.87%, representing some profit-booking after the recent rally.
Combined institutional holdings of 36.73% (FII, MF, Insurance, and other DII) reflect significant professional investor interest. The absence of promoter pledging and steady institutional participation provide confidence in corporate governance and strategic direction. The gradual shift from insurance and retail holdings towards FII ownership suggests evolving investor composition as the stock gains international visibility.
Stock Performance: Sustained Momentum Across Timeframes
HPCL's stock price performance demonstrates strong momentum across multiple timeframes, with the shares consistently outperforming the Sensex benchmark. The stock has delivered positive alpha across all measured periods, reflecting both company-specific improvements and favourable sector dynamics.
| Period | HPCL Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Month | 6.94% | 5.34% | +1.60% |
| 3 Months | 11.26% | 3.77% | +7.49% |
| 6 Months | 25.10% | 5.37% | +19.73% |
| YTD | 15.83% | 8.21% | +7.62% |
| 1 Year | 25.48% | 5.77% | +19.71% |
| 3 Years | 238.91% | 41.02% | +197.89% |
| 5 Years | 282.42% | 113.44% | +168.98% |
The six-month return of 25.10% with alpha of 19.73% highlights the stock's strong recent performance, driven by improving quarterly results and expanding margins. The three-month gain of 11.26% demonstrates sustained momentum, whilst the year-to-date return of 15.83% outpaces the broader market by 7.62 percentage points.
Longer-term returns prove even more impressive, with the three-year return of 238.91% and five-year return of 282.42% reflecting substantial wealth creation. However, these extended-period returns should be contextualised against the low base following the pandemic-induced downturn and subsequent margin compression in FY23 when the company reported losses.
The stock currently trades above all key moving averages—5-day (₹450.63), 20-day (₹450.22), 50-day (₹419.36), 100-day (₹419.06), and 200-day (₹391.03)—indicating strong technical momentum. The beta of 1.20 suggests higher volatility than the broader market, typical for cyclical oil sector stocks. The risk-adjusted return of 0.81 with volatility of 31.34% positions HPCL in the "medium risk, high return" category, appropriate for investors with moderate risk tolerance.
Investment Thesis: Quality Refiner at Reasonable Valuation
HPCL's investment case rests on several pillars: improving refining margins, operational efficiency gains, strong return ratios, and reasonable valuation. The company has successfully navigated the margin compression cycle of FY24-25 and emerged with strengthened profitability in the current fiscal year. The technical trend remains bullish across weekly and monthly timeframes, with multiple indicators signalling positive momentum.
The quality assessment of "GOOD" reflects healthy long-term growth, absence of promoter pledging, strong institutional participation, and consistent dividend payments. The financial trend classification of "POSITIVE" captures the improving quarterly trajectory, whilst the bullish technical trend provides near-term momentum support.
However, investors must recognise the inherent cyclicality of refining margins and the potential for volatility in crude oil prices to impact profitability. The elevated debt-to-equity ratio and capital-intensive nature of the business require continued monitoring of cash flows and capital allocation decisions. The PEG ratio of 2.93x suggests limited room for multiple expansion from current levels.
Key Strengths & Risk Factors
KEY STRENGTHS
- Superior Capital Efficiency: ROE of 18.58% ranks amongst the highest in the oil sector, demonstrating excellent capital allocation and profitability generation
- Margin Recovery Momentum: Operating margins expanded from 2.70% to 6.83% year-on-year, reflecting improved refining economics and operational efficiency
- Strong Institutional Support: Combined institutional holdings of 36.73% with rising FII participation signals professional investor confidence in the turnaround story
- Attractive Valuation: P/E of 9.76x offers reasonable entry point relative to sector average of 16x, despite superior ROE profile
- Consistent Dividend Payer: Dividend yield of 2.24% with moderate payout ratio of 33.18% provides income whilst retaining capital for growth
- Government Backing: Majority ownership by ONGC (54.90%) provides strategic stability and potential upstream integration benefits
- Technical Momentum: Stock trading above all key moving averages with bullish indicators across timeframes supporting near-term price action
KEY CONCERNS
- Margin Cyclicality: Refining margins remain highly cyclical and vulnerable to global capacity additions and demand fluctuations, creating earnings volatility
- Elevated Leverage: Debt-to-equity ratio of 1.31x and debt-to-EBITDA of 1.19x reflect significant borrowings typical of capital-intensive operations
- Sequential Profit Decline: Q2 FY26 profits declined 6.12% quarter-on-quarter despite strong year-on-year comparison, suggesting potential margin normalisation
- Limited Multiple Expansion: PEG ratio of 2.93x indicates valuation is somewhat elevated relative to growth, limiting upside from multiple expansion
- Crude Price Exposure: Inventory gains/losses and crude oil price volatility can create significant quarterly earnings variability
- Working Capital Intensity: Negative closing cash positions and high current liabilities reflect the capital-intensive nature and working capital demands of the business
- Competition Intensity: Faces competition from both private sector refiners and other PSU oil companies in marketing and refining segments
Outlook: Key Monitoring Points
POSITIVE CATALYSTS
- Sustained Margin Environment: Continued healthy refining margins supporting profitability above 6% operating margin threshold
- Volume Growth: Rising petroleum product demand in India driven by economic growth and infrastructure development
- Capacity Expansion: Completion of refinery upgrades and capacity additions enhancing throughput and product flexibility
- Retail Network Expansion: Growing fuel station network improving market share and marketing margins
- Dividend Growth: Potential for dividend increases as profitability improves and payout ratio remains moderate at 33%
RED FLAGS
- Margin Compression: Any significant decline in gross refining margins below 5% operating margin level would pressure profitability
- Rising Interest Costs: Increase in interest expenses beyond current ₹800 crore quarterly run rate would impact net profitability
- Working Capital Deterioration: Further increase in current liabilities without corresponding asset growth would strain liquidity
- Institutional Selling: Reversal of FII accumulation trend or significant mutual fund redemptions would create selling pressure
- Regulatory Changes: Adverse changes in fuel pricing mechanisms or taxation policies impacting profitability
The Verdict: Solid Recovery Play with Cyclical Risks
Score: 78/100
For Fresh Investors: HPCL offers an attractive entry point for investors seeking exposure to India's refining sector with improving margin trajectory. The combination of reasonable valuation (P/E 9.76x), superior ROE (18.58%), and positive momentum makes it suitable for fresh allocation. However, limit position size to 3-5% of portfolio given cyclical risks and moderate exposure to margin volatility.
For Existing Holders: Continue holding with a medium-term perspective. The improving profitability trend and strong institutional support justify maintaining positions. Consider partial profit-booking if stock approaches ₹500-520 levels (6-10% upside), where valuation becomes less compelling. Reinvest during any correction towards ₹420-440 levels.
Fair Value Estimate: ₹510-530 (9% upside from current levels), based on 11-12x forward earnings and sustained operating margins of 6-7%. The stock offers moderate upside potential with dividend yield providing downside cushion.
⚠️ Investment Disclaimer: This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
