India’s domestic petroleum consumption growth will be 4-5x the world average, and is expected to grow at ~5% over the coming decade. However, the mix is expected to change in favor of gas (current share at ~7% v/s world average of ~24%) and clean energy sources. Indian petroleum consumption will be supported by (a) rising affluence and urbanization, (b) massive potential in end-market growth, (c) young, vibrant and upwardly mobile working class and (d) stable and pro-development government. Supportive macroeconomic trends that will drive energy demand and mix include: (a) improving GDP – more freight movement, (b) increasing disposable income, (c) thrust on clean energy sources and (d) demographic change with a higher share of working age population.

Valuation : Pure play petroleum marketing companies - US based CST Brands (CST US; M Cap: USD3.6b) and New Zealand based Z Energy (ZEL NZ; M Cap: USD2b) trade at >10x EV/EBITDA. These valuations (in-line with the underlying business dynamics) are more similar to consumer business than refining or oil & gas. They value HPCL (on FY18E) at 5x for refining and 7.5x for marketing to arrive at a fair value of INR1,490 implying a 19% upside. HPCL trades at 8.8x FY18E standalone EPS and 7x FY18E consolidated EPS of INR175. Maintain Buy.