CMP: INR567 TP: INR632(+11%) Buy

Transcription

1 BSE SENSEX S&P CNX 3,28 9,595 Bloomberg HPCL IN Equity Shares (m),6 M.Cap.(INRb)/(USDb) 58.6 / Week Range (INR) 584 / 275, 6, 2 Rel. Per (%) -3/5/83 Avg Val, INRm 83 Free float (%) 48.9 Financials & Valuations (INR b) Y/E Mar 27 28E 29E Net Sales,87,755,952 EBITDA PAT EPS (INR) Gr. (%) 66.6 (25.3).4 BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Estimate change TP change Rating change 26 May 27 4QFY7 Results Update Sector:Oil & Gas HPCL CMP: INR567 TP: INR632(+%) Buy EBITDA above estimate; GRM at ~USD8/bbl 4QFY7 EBITDA stood at INR27.8b (est. of INR2.8b; +8% YoY, -3% QoQ), led by (a) reported GRM of USD7.99/bbl (includes inventory loss of USD.5/bbl) and (b) product inventory gain of INR7b. Reported PAT rose 3% YoY (+4% QoQ) to INR8.2b (est. of INR.b) as the impact of higher-than-expected interest cost of INR2.3b (est. of INR7m; +5% YoY, +328% QoQ) was negated by higher other income of INR5.2b (est. of INR3.3b; +7% YoY, +26% QoQ) and a lower tax rate at 24% (v/s 34% in 3QFY7 and 37% in 4QFY7). Management has taken a provision of INR4.5b on account of pay revision. GRM at ~USD8/bbl: HPCL s core operating GRM of USD8.5/bbl was above our estimate, with reported GRM at ~USD8/bbl (est. of USD5.6; +6% YoY, +25% QoQ). Product inventory gains stood at INR7b in 4QFY7 v/s loss of INR29m in 4QFY6 and INR7b in 3QFY7. Forex gain stood at INR.5b in 4QFY7 v/s loss of INR.6b in 3QFY7 and loss of INR3b in 4QFY6. Marketing volumes including exports down 2% YoY: While marketing sales fell 2% YoY to 8.9mmt, refinery throughput was at 4.6mmt (-.3% YoY, flat QoQ). Dividend of INR3/share for FY7: Management has recommended a final dividend of INR./share, making total dividend of INR3/share (~5.3% dividend yield) for FY7. Nil subsidy sharing in 4QFY7: As expected, subsidy sharing was nil in 4QFY7, and we model OMCs subsidy sharing at nil in FY8/FY9. Valuation and view: We value HPCL s refining segment at 5x, marketing at 8x, pipeline at 7.5x and add investments to arrive at a target price of INR632, implying a total return of ~6% (% + ~5.3% of dividend yield). HPCL trades at 2.4x FY9E standalone EPS of INR45.8. Maintain Buy. Standalone - Quarterly Earning Model (INR Million) Y/E March FY6 FY7 FY6 FY7 FY7 Var. vs Q 2Q 3Q 4Q Q 2Q 3Q 4Q 4QE est Net Sales 57,24 42,36 429,376 4, ,793 42,36 484,856 54,42,776,949,867,97 57,26 -% YoY Change (%) EBITDA 29,82 -,265 2,7 25,89 35,653,89 28,636 27,754 76,57 3,933 2,843 33% Margins (%) Depreciation 7,58 5,428 6,96 6,67 6,8 6,6 6,336 6,749 26,566 25,353 6,87 -% Interest,227,65,639,966,395, ,268 6,483 5, % Other Income 3,38 3,64 2,725 4,82 3,368 6,88 2,276 5,53 4,35 6,985 3,324 55% PBT 24,24-4,74 5,838 2,975 3,58,755 24,46 23,89 57,33 9,28 6,65 43% Tax 8,324 -,499 5,425 8,96,534 3,74 8,43 5,72 2,346 28,2 5,549 3% Rate (%) Reported PAT 5,88-3,25,43 3,879 2,984 7,3 5,93 8,88 36,967 62,88, 64% YoY Change (%) 3, Margins (%) Key Assumptions Refining throughput (mmt) % GRM (USD/bbl) % Marketing sales volume incl exports (mmt) % Marketing GM per litre (INR/litre) % E: MOSL Estimates Swarnendu Bhushan (Swarnendu.Bhushan@MotilalOswal.com); Abhinil Dahiwale (Abhinil.Dahiwale@motilaloswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit : HPCL Quarterly earnings snapshot (INRm) QFY6 2QFY6 3QFY6 4QFY6 QFY7 2QFY7 3QFY7 4QFY7 YoY (%) QoQ (%) Key Operating Metrics Crude cost (USD/bbl) % 8% Fx rate (INR/USD) % % Marketing volume (mmt) % -5% GRM (USD/bbl) % 25% Reuters Singapore GRM (USD/bbl) % % Refinery thr' put (mmt) % % Financial Summary (INRm) Net Sales 53,86 42, ,376 4, ,793 42,36 484,856 54,42 25% 6% Adj. EBITDA 25,92 3,333 26,94 26,743 25,268 6,69 22,336 28,86 8% 29% Refining,864,893 3,455 3,357, 2,853,63 4,224 6% 34% Marketing & others 3,328,44 2,74 3,387 4,58 3,756,75 4,636 9% 25% EBITDA Margin (%) 4.9% 3.2% 6.% 6.5% 5.6% 4.% 4.6% 5.6% Adventitious gain/(loss) 5,8 (4,) (4,22) 29, (4,) 7, -% -% Net subsidy gain/(loss) 43 (37) -% - Forex gain/(loss) (,33) - - Reported EBITDA 3,992 (667) 22,44 26,663 36,268 2,69 28,33 28,86 8% 3% EBITDA Margin (%) 6.% -.2% 5.2% 6.5% 8.% 3.% 5.8% 5.6% Depreciation (7,53) (5,389) (6,96) (6,67) (6,8) (6,6) (6,336) (6,749) % 7% EBIT 23,479 (6,56) 5,445 9,993 3,6 6,45 2,698 22, % 2% Interest (,248) (,683) (,639) (,966) (,395) (,64) (53) (2,268) 5% 328% Other Income 3,99 3,778 2,725 4,82 3,368 6,88 3,579 5,53 7% 44% PBT b/f exceptionals 25,43 (3,96) 6,53 22,83 32,33,473 24,747 24,996 9% % Exceptionals PBT 25,43 (3,96) 6,53 22,83 32,33,473 24,747 24,996 9% % Income Tax (8,46),477 (5,425) (8,96) (,534) (3,74) (8,43) (5,72) -3% -3% Tax rate (%) 33.3% 37.3% 32.8% 35.5% 32.8% 32.6% 32.9% 22.8% PAT 6,97 (2,484),5 4,734 2,599 7,732 6,64 9,294 3% 6% PAT margin (%) 3.3% -.6% 2.6% 3.6% 4.8%.8% 3.4% 3.8% EPS 6.7 (2.4) % 6% Exhibit 2: Ad-hoc subsidy sharing resulting in volatile quarterly profits (INRb) PAT Net (under)/over recovery (92) QFY3 2QFY3 3QFY3 4QFY3 QFY4 2QFY4 3QFY4 4QFY4 QFY5 2QFY5 3QFY5 4QFY5 QFY6 2QFY6 3QFY6 4QFY6 QFY7 2QFY7 3QFY7 4QFY7 (7) (54) (5) (7) (34) (3) () () (3) () May 27 2

3 Exhibit 3: HPCL Marketing volume trend -2.% YoY and -4.5% QoQ (mmt) Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q FY3 FY4 FY5 FY6 FY7 Exhibit 4: HPCL GRM trend 4QFY7 GRM at USD7.99/bbl vs SG GRM of USD6.4/bbl (In USD/bbl) HPCL GRM Singapore GRM (2.) (.) QFY3 2QFY3 3QFY3 4QFY3 QFY4 2QFY4 3QFY4 4QFY4 QFY5 2QFY5 3QFY5 4QFY5 QFY6 2QFY6 3QFY6 4QFY6 QFY7 2QFY7 3QFY7 4QFY7 Exhibit 5: HPCL refinery-wise throughput trend; -% YoY, flat QoQ Refinery thr'put (mmt) Mumbai Vizag Total Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q FY3 FY4 FY5 FY6 FY7 26 May 27 3

4 Valuation and view HPCL is embarking upon a huge capex cycle with Vizag expansion, BS-VI, Rajasthan refinery & marketing complex. We believe that it will spend at least INRb each year going forward. Additionally, with no major refinery expansion in the near term, it may lose market share to IOCL in the South as IOCL will have access to more refined products with commissioning of Paradip refinery. Private players have also become aggressive in retail and all OMCs will lose market share going forward. However, Bhatinda refinery would show further improvement through reduction in debt/interest cost. We value HPCL s refining segment at 5x, marketing at 8x, pipeline at 7.5x and add investments to arrive at a target price of INR632, implying a total return of ~6% (% + ~5.3% of dividend yield). HPCL trades at 2.4x FY9E standalone EPS of INR45.8. Maintain Buy. Exhibit 6: HPCL Key Assumptions Y End: March E 29E Exchange Rate (INR/USD) Brent Crude (USD/bbl) Market Sales (MMT) YoY (%) GRM (USD/bbl) Singapore GRM (USD/bbl) Prem/(disc) (USD/bbl) () (5) (6) (2) (4) () () () Total Refinery throughput (MMT) YoY (%) -6% % -3% -2% 4% 6% 3% -% % Refining capacity utilization (%) 3% 5% 9% 7% 5% 9% 6% 2% 8% 8% Blended marketing margin excld inventory (INR/lit) Under recoveries Sharing (INRb) Gross under recoveries Upstream sharing Govt. sharing Net sharing Net sharing (%) 2% 9% % % % 3% % % % % 26 May 27 4

5 Story in charts Exhibit 7: HPCL s GRMs have underperformed Singapore GRM (USD/bbl) Prem/(Disc) to Singapore HPCL Blended GRM Singapore GRM (.6) (.7) (.8) (.4) (.4) (3.) (2.2) (3.5) (5.6) FY FY FY2 FY3 FY4 FY5 FY6 FY7 FY8E FY9E Exhibit 9: Expect EBITDA to be driven up higher marketing margins EBITDA (INRb) PAT (INRb) FY FY FY2 FY3 FY4 FY5 FY6 FY7 FY8E FY9E Exhibit 8: While refining capacity has been largely flat, marketing sales have shown steady increase Marketing Sales (mmt) Refinery Throughput (mmt) Exhibit : Expect D/E ratio to decline with increasing profitability (x) 6 6 FY FY FY2 FY3 FY4 FY5 FY6 FY7 FY8E FY9E D/E Ratio FY FY FY2 FY3 FY4 FY5 FY6 FY7 FY8E FY9E Exhibit : Diesel deregulation to reduce working capital leading to lower interest costs Total Debt (INRb) Interest Cost (INRb) FY FY FY2 FY3 FY4 FY5 FY6 FY7 FY8E FY9E Exhibit 2: HPCL: Year Forward P/E Chart 27 PE (x) Peak(x) Avg(x) Min(x) May-7 Aug-8 Nov-9 Feb- May-2 Aug-3 Nov-4 Feb-6 May-7 26 May 27 5

6 Financials and Valuations Standalone - Income Statement (INR Million) Y/E March FY3 FY4 FY5 FY6 FY7 FY8E FY9E Net Sales 2,65,293 2,23,454 2,63,84,777,6,87,237,755,377,952,2 Change (%) Finished Goods,28,786,45,38,292,784,59,484,227,37,95,883,233,565 Raw Materials Cons 639,92 63,88 599,79 49,25 46, , ,589 Other Exp 4,63 4,2 7,765 29,4 3,33 28,27 32,95 Total Expenditure 2,25,869 2,79,372 2,9,627,697,63,764,467,66,636,853,69 % of Sales EBITDA 39,424 52,8 54,76 79,393 5,77 94,74 98,942 Margin (%) Depreciation 9,35 2,884 9,72 26,532 25,353 29,87 3,87 EBIT 2,9 3,97 34,465 52,86 8,48 65,653 67,855 Int. and Finance Charges 8,377 5,46 7,66 6,536 5,357 6,626 9, Other Income 2,3,4 4,42,442 5,47,58,974 PBT bef. EO Exp. 4,32 26,55 4,54 57,766 9,28 69,546 69,829 EO Items 74 PBT after EO Exp. 4,746 26,55 4,54 57,766 9,28 69,546 69,829 Total Tax 5,699 8,87 4,29 2,55 28,2 23,8 23,274 Tax Rate (%) Reported PAT 9,47 7,338 27,333 37,262 62,88 46,366 46,555 Adjusted PAT 8,334 7,338 27,333 37,262 62,88 46,366 46,555 Change (%) Margin (%) Standalone - Balance Sheet (INR Million) Y/E March FY3 FY4 FY5 FY6 FY7 FY8E FY9E Equity Share Capital 3,39 3,39 3,39 3,39,7,7,7 Total Reserves 33,874 46,732 56,83 76,38 93,3 223, ,549 Net Worth 37,264 5,22 6,22 79,698 23, , ,72 Total Loans 324,583 39,3 7,556 43,95 7,76 27, 33, Deferred Tax Liabilities 35,984 39,84 4,36 52,84 59,682 59,682 59,682 Capital Employed 497,83 58,56 37,83 376,46 434, ,22 653,42 Gross Block 37,62 424,668 48, ,4 64,65 6,749 64,749 Less: Accum. Deprn. 44,575 65,545 9,2 26,28 243, ,383 33,47 Net Fixed Assets 225, ,22 29,628 33,76 36,39 329, ,278 Capital WIP 5,729 45,856 34,744 8,528 8,5 2,97 8,97 Total Investments 6,269 8,599 2,45 5,786 9,86 9,86 9,86 Curr. Assets, Loans&Adv. 378, ,24 237,79 24,44 296,37 295,75 349,556 Inventory 64,387 87,754 29,723 32,4 85,763,93 2,846 Account Receivables 49,35 54,66 36,3 37,58 4,642 9,237 2,392 Cash and Bank Balance, ,952 28,393 Loans and Advances 63,754 9,444 7,796 7,472 69,296 74,422 77,926 Curr. Liability & Prov. 264,67 267,275 33,693 39, , ,5 324,589 Account Payables 24, , ,93 3, , ,98 34,64 Provisions 22,995 23,296 29,79 8,4 25,98 9,24 9,975 Net Current Assets 4,345 94,93-65,974-78,928-53,74 3,699 24,967 Appl. of Funds 497,83 58,56 37,83 376,46 434, ,22 653,42 E: MOSL Estimates 26 May 27 6

7 Financials and Valuations Ratios Y/E March FY3 FY4 FY5 FY6 FY7 FY8E FY9E Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) FCF per share Return Ratios (%) RoE RoCE RoIC Working Capital Ratios Asset Turnover (x) Debtor (Days) Leverage Ratio (x) Net Debt/Equity Standalone - Cash Flow Statement (INR Million) Y/E March FY3 FY4 FY5 FY6 FY7 FY8E FY9E OP/(Loss) before Tax 4,746 26,55 4,54 57,766 9,28 69,546 69,829 Depreciation 9,344 2,884 9,72 26,532 25,353 29,87 3,87 Direct Taxes Paid -5,699-8,87-4,29-2,55-28,2-23,8-23,274 (Inc)/Dec in WC -34,93 8,29 6,727 3,2-25,88 44,76 5,73 CF from Operations -6,522 57,53 27,77 76,85 62,352 9,63 82,85 Others 5,3 3,,952,778 6,868 CF from Operating incl EO -,39 6,64 29,723 88,592 69,22 9,63 82,85 (Inc)/Dec in FA -43,69-49,647-4,6-5,763-55,73 -, -, Free Cash Flow -45,,968 69,67 37,829 4,48 9,63-7,85 (Pur)/Sale of Investments -2,564-2,329-3,86 6,629-3,4 CF from Investments -46,83-5,976-43,922-44,34-58,573 -, -, Inc/(Dec) in Debt 49,79-5,282-48,744-26,67 27,756 98,294 6, Dividend Paid -3,368-6,4-9,985-4,6-35,72-6,38-6,375 Others 359,66-7,248-3,724-2,62 CF from Fin. Activity 46,782-9,762-65,977-44,39 -,548 8,986 43,625 Inc/Dec of Cash , ,66 26,44 Opening Balance 2,264, ,952 Closing Balance, ,952 28, May 27 7

8 Corporate profile Company description Fortune-5 company, HPCL is a refining and marketing company in India and also has interests in upstream. It owns 4.8mmt of refining capacity, split across Mumbai (6.5mmt) and Vishakapatnam (8.3mmt). It has a crude and product pipeline network of ~2,4km and sells ~3mmt of petroleum products. HPCL also holds a 6.9% stake in MRPL and 49% stake in 9mmt Bhatinda refinery. HPCL is a state-owned company, with 5.% Government of India (GoI) stake. Exhibit : Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Mar-7 Dec-6 Mar-6 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding LIFE INSURANCE CORPORATION OF INDIA 2. STICHING DEPOSITORY APG EMERGING MARKETS EQUITY POOL.5 Source: Capitaline Exhibit 4: Top management Name Mukesh Kumar Surana J Ramaswamy Pushp Kumar Joshi S Jeya Krishnan Designation Chairman & Managing Director Director (Finance) & CFO Director (Human Resources) Director (Marketing) Exhibit 5: Directors Name Sandeep Poundrik Vinod S Shenoy Name Urvashi Sadhwani Ram Niwas Jain Shrikant M Bhosekar Company Secretary *Independent Source: Capitaline Exhibit 6: Auditors Name A Ramachandra Rao & Co CMA Rohit J Vora CVK & Associates G M Kapadia & Co R Nanabhoy & Co Type Branch Cost Auditor Statutory Statutory Cost Auditor Source: Capitaline Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY Source: Bloomberg 26 May 27 8

9 N O T E S 26 May 27 9

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