Hindustan Petroleum Corporation Ltd Power Packed Performance BSE Code 514 NSE Code HINDPETRO Bloomberg Code HPCL@IN Face Value 1 CMP Rs 319.5 Market Cap Rs 18bn (as on September 1, 24) Share Holding Pattern 19% 7% 2% 13% Govt. of India 8% Banks, FIs, Insu Cos, Private Corporate Bodies Share Price Chart 51% Mutual Funds and UTI FIIs Indian Public Industry Background Last fiscal saw Indian economy registering a handsome 8.2% growth in GDP. Higher growth resulted from increased industrial activity and favorable government policies. As the wheels of economy raced ahead the need for fuel consumption grew accordingly. Petroleum product consumption increased 3.4% to 17.7mmt as against 14.2mmt in the previous year. The product-wise consumption break-up is as follows: Products 23-4 22-3 Growth (%) HSD 37.2 36.6 1.6 ATF 2.5 2.2 13.6 Bitumen 3.4 2.9 17.2 LPG 9.3 8.3 12. Kerosene 1.2 1.4 (1.9) Figure in mmt (million metric ton) The regulation on parallel marketing of kerosene saw HSD consumption growing at a healthy rate in later half of the fiscal, even registering a double digit growth in the last quarter of the fiscal. Interestingly, HSD consumption growth was negative in first half of the FY4. Automobile boom led to a growth of 5.2% in MS consumption, whereas Naphtha sales dropped by about 3% due to increasing acceptance of natural gas in place of naphtha. Bitumen consumption increased on account of large-scale road construction projects. The domestic refinery capacity in fiscal 23-4 increased to 125.96mmt from 115mmt in FY3. All the refineries put together recorded a throughput of 119mmt. In order to meet the new fuel specification as laid down by the Mashelkar Committee, the refineries are expected to invest close to Rs3bn Rs18bn by 25 and an additional Rs12bn by 21. Thus further capacity expansion are on anvil in conjunction with the upgradation plans, which is expected to increase refineries capacity to 14mmt by FY7. However, demand is expected to be around 124mmt by FY7, thus surplus in refinery capacity is likely to continue in the extended future. The country exported 14.6mmt of petroleum products and at the same time imported 7.87mmt of petroleum products (mainly LPG), thus becoming a net petroleum product exporting nation. Export of petroleum products jumped 56% in US$ terms. Export of ATF, HSD and MS grew 138%, 9% and 27% respectively. The fiscal saw unabated increase in crude prices, particularly in later half of the year. The average Brent crude oil prices increased to US$29/bbl in FY4 as against US$27/ bbl in the FY3. However, the increase in product price was higher than the increase in crude price, thereby leading to improved refiners margin across the world. September 3, 24 1
The fiscal also saw entry of private and foreign players viz Reliance, Essar and Shell in retail business, which is expected to drive major restructuring of the business and will considerably improve delivery mechanism to the consumers. The industry saw addition of more than 3, retail outlets (mostly by PSU companies) as against average yearly addition of 6 outlets during the period of 1998-23, indicating the intensity of competition. Another important event in the industry was commissioning of first LNG (Liquified Natural Gas) terminal by Petronet LNG Ltd, the company promoted by oil PSUs and Indian financial institution for import and regassification of LNG. Natural gas is environment friendly and are expected to replace a major quantum of industrial liquid fuels in the days to come. Government Policies During first week of August the Government came out with a guideline on petroleum product pricing. Under the mechanism the oil marketing companies (OMCs) will be given autonomy to change prices within a band. The prices of MS and HSD will be based on mean of last three months and last 12 months average CIF prices of respective products. The OMCs can change prices within 1% of the price so arrived at and for changes beyond this band the OMCs have to take permission from the Oil ministry. This will help OMCs to stem downward pressure on marketing margins, and partially set-off losses on account of under-recovery on LPG and kerosene subsidy. The recent cut in custom and excise duty on petroleum products by the Government will put pressure off OMCs marketing margins. The cut in custom duty on petroleum products will reduced refinery margins and will affect standalone refineries the most. However with the fundamentals in favor of refineries, the duty cut will not have any severe impact on their balance sheet. Integrated company will not have any impact, as the lower refinery margins will be setoff against increased marketing margins. The ONGC and GAIL will be least affected, as there is no duty cut on crude oil and duty cut on LPG will not have any material impact, as LPG is a small part of their business. September 3, 24 2
Company Background The company is a leading downstream player with net sales of Rs515bn and PAT of Rs19bn recording yoy growth of 6% and 24% respectively. Its EPS stood at Rs56.2 during the FY4. The company commands about 2% of the market share. Businesses Refineries Mumbai Refinery (MR): The MR achieved a crude throughput of 6.11mmt against the installed capacity of 5.5mmt. The gross refinery margins (GRMs) stood at US$4.26/ bbl in FY4 as against US$2.84/bbl in FY3. Visakh Refinery (VR): The VR achieved a crude throughput of 7.59mmt as against the installed capacity of 7.5mmt. The GRMs were at US$4.61/bbl this year as against US$4.4/bbl in FY3. Mangalore Bangalore Pipeline The 363km pipeline was completed by joint venture company Petronet MHB during the year. The pipeline capacity to be increased to 8.5mmtpa by the end of Phase-II (213-14). The pipeline can transport MS, HSD, SKO and Naphtha. Exhibit 1: Throughput in mmt 8 6 mmt 4 2 FY FY1 FY2 FY3 FY4 Pipeline Throughput Mumbai Refinery Visakh Refinery September 3, 24 3
Marketing The company recorded a volume growth of 2.9% to 18.75mmt thus commanding a market share of 2.2% in the year 23-4. Retail constitutes 55% of the company s volume base. It commands a market share of 22.5% in retail segment at 1.52mmt in FY4. The company added 639 new retail outlets taking the total count to 552 in FY4. The company accredited 578 more retail outlets under its branded outlet Club HP taking total counts to 128 by the end of FY4. The company s branded MS Power and branded HSD Turbojet recorded impressive growth and achieved volume of 69,kl and 44kl respectively. Exhibit 2: Sales Volume 25 mmt 2 15 1 2.48 1.6 2.76 2.38 2.58 2.75 1.5 1 1 9.9 5 4.11 4.89 5.37 5.93 6.55 FY FY1 FY2 FY3 FY4 Light Distillates Middle Distillates Heavy Dis tillates Direct Sales Direct sales consist of industrial & Government sales and Lubricants trade line. It recorded a growth of 5.3% with volume of 5.94mmt in FY4 as against 5.64mmt in FY3, thus commanding a market share of 16.3% in the segment. Industrial & Government (I&G) Sales: I&G division recorded sales of 5.36mmt in FY4 as against 5.11mmt in FY3 and commanded a market share of 16.2%. Bitumen and naphtha grew by 23% and 7.5% respectively and contributed a large chunk of said growth. Lubes: HPCL has a strategic advantage as it controls 4% of the lubricant base oil capacity. The company marketed.35mmt of lubricants and thus commanded 34.6% of the market share. September 3, 24 4
Aviation The company added 12 new foreign airlines into its portfolio and achieved sales of 26,kl in this segment. The company has tie-up with Chevron Texaco, which help it to improve its service standard. LPG The company achieved a sale of 2.28mmt thus recording a growth of 12.7% in FY4. The company added 95 new distributors taking its total count to 1,993. The company boasts of 2mn customers with addition of 2.1mn customers during the year. CAPEX New Pipeline Projects: The company has planned an extension of Mumbai-Pune Pipeline to Pakni via Hazarwadi and Derating of Trombay-Vashi section of the Mumbai-Pune Pipeline with an estimated cost of Rs3.35bn the project is expected to be completed within 24 months after getting all the regulatory clearance. A proposal for new pipeline originating from Mundra off West coast to Bahadurgarh near Delhi with intermediate tap off at Palanpur (Gujarat), Ajmer and Jaipur (Rajasthan), and Rewari (Haryana) is under implementation. It will have a capacity of 5.8mmtpa and will be completed within 36months after getting all the regulatory clearance. The cost of the project is estimated to be Rs14bn. Upgradation and Expansion of refinery Capacity The company has envisaged upgradation cum expansion of both the refineries to meet Mashelkar committee recommendation on emission norms. Mumbai refinery s capacity is expected to increase from 5.5mmtpa to 7.9mmtpa with an investment of Rs11.52bn. Similarly Visakh refinery s capacity is to be expanded from 7.5mmtpa to 8.33mmtpa with a planned investment of Rs16.35bn. September 3, 24 5
Joint Ventures and Subsidiaries Guru Gobind Singh Refineries Ltd The company was incorporated on December 2 as wholly owned subsidiary of the HPCL with the objective of setting up a 9mmtpa grass root refinery with initial capacity of 6mmtpa. The company has already sunk in a sum of Rs3bn in the project and has made commitment to the extent of Rs3.8bn. The fiscal incentives as promised by the Punjab Government will have a significant bearing on the viability of the project and its future prospects. The company has not yet notified any tentative completion schedule. Mangalore Refinery & Petrochemical Ltd (MRPL) MRPL is a pure refinery company having a capacity of 9mmtpa and HPCL owns 16.95% of the company. After years of losses company made a turnaround and recorded a profit. During FY4, it recorded turnover of Rs126bn and PAT of Rs4.6bn as against net loss of Rs4.1bn in FY3. Petronet MHB Ltd (PMHBL) PMHBL was formed for the construction and operation of Mangalore-Hassan- Bangalore pipeline, which has been rolled out in this fiscal. HPCL holds 26% stake in the company, ONGC is the other major shareholder with 23% of the equity. Prize Petroleum Company Ltd The company was formed in association with ICICI and HDFC for its foray in to Exploration & Production of hydrocarbons. The company has been awarded an oil block in the Cambay Area and three marginal onshore field in Gujarat. Bhagyanagar Gas Ltd The company was formed in association with GAIL, each picking up 22.5% of equity to distribute and market CNG and LNG for use in transportation, domestic, commercial and industrial sector in Andhra Pradesh. The company expects to commence its business during the FY5. South Asia LPG Company Private Ltd (SALPG) The JV was promoted in association with Total Fina Elf of France for the construction of LPG Underground Cavern storage of 6,mt capacity and associated receiving and dispatch facilities at Visakhapatnam. The cost of the project is estimated at Rs3.33bn and is expected to be completed by July 26. September 3, 24 6
Financial Analysis - Financial highlights of the last five years Particulars FY FY1 FY2 FY3 FY4 CAGR (Rs mn) (%) Gross Sales 343,68 471,175 453,97 526,99 563,326 13.2 % yoy - 37.1-3.84 16.31 6.89 - EBITDA 17,279 21,49 2,467 31,391 36,427 2.5 % yoy - 23.9-4.4 53.37 16.4 - Interest 1,54 3,873 2,947 1,53 557 (22.) PAT 1,574 1,88 7,88 15,374 19,39 15.8 % yoy - 2.89-27.58 95.1 23.84 - Export - - - 7,996 11,236 - EPS 31.21 32.11 23.26 45.38 56.2 15.8 GRMs (US$/bbl) 1.86 1.82 1.84 2.87 4.3 23.3 Reading between the lines Revenue During the last five years company achieved a CAGR of 13.2% in its gross sales. For FY4 the company recorded a growth of 6.9% in topline to Rs563bn as against gross sales of Rs526bn in FY3. The said growth was on account of 2.9% increased in volumes and better realization by refinery business. Exports registered massive growth of 4% yoy to Rs11.2bn in FY4 including export of.78mmt of bulk petroleum products worth Rs9.7bn. Exhibit 3: Gross sales over the years 6 4 Rs in mn 5 4 3 2 1 3 2 1 1999-2-1 21-2 22-3 23-4 (%) -1 Gross Sales Growth Rate September 3, 24 7
EBITDA EBITDA recorded a CAGR of 2.5% over the last five years. EBITDA for the FY4 was at Rs36.4bn as against Rs31.3bn in FY3 thus showing a 16% yoy growth. The growth in EBITDA was due to deceleration in raw material cost for two reasons first, rupee appreciation in the fiscal brought down the crude import bill and second discount received from upstream oil companies on purchase under the directive of Government for sharing under-recovery on LPG and SKO subsidy. The company received a sum of Rs6.9bn from upstream majors a part of their share of subsidy on LPG and SKO. Crude Procurement During the year company procured 9.18mmt of imported crude oil worth Rs91.2bn, which accounted for two third of the total crude oil cost. The import bill on account of crude purchased stood at Rs79.4bn in FY3, representing 6% of its crude requirement. Thus indicating increased dependence on import. Exhibit 4: Gross Refinery Margins (GRMs) over the years 5 4 US$/bbl 3 2 1 FY FY1 FY2 FY3 FY4 Bottomline PAT increased by impressive 24% to Rs19bn in FY4 as against Rs15.3bn in FY3 on account of better realization, increased volumes, sharing of under recovery on LPG and SKO subsidy by upstream companies and lower interest outgo. The company achieved a CAGR of 15.8% over the last five years. Exhibit 5: PAT over the years September 3, 24 8
Exhibit 6: Profitability Ratios 5 4 (%) 3 2 1 FY2 FY3 FY4 OPM (%) PAT % ROCE RONW Exhibit 7: DPS and EPS over the years 6 5 56.4 4 43.67 Rs 3 2 23.39 27.76 28.33 1 1 1 1 2 22 FY FY1 FY2 FY3 FY4 DPS EPS Working Capital Management The company s working capital situation has marginally deteriorated, due to increase in current assets (inventory, debtors and loans & advances) as on one hand and decline in current liabilities on the other. Turnover ratios have also shown the similar trend. September 3, 24 9
Exhibit 8: Turnover Ratio 6 5 4 Days 3 2 1 FY2 FY3 FY4 Debtors days Inventory days Creditors days Leverage Ratio As is evident from the exhibit below the D/E ratios has consistently come down, after touching its highest level in FY1. As a result interest costs have also come down from Rs3.87bn in FY1 to Rs556mn in FY4. Exhibit 9: D/E Ratios.6.5 D/E Ratio.4.3.2.1. 1999-2-1 21-2 22-3 23-4 September 3, 24 1
Outlook Refinery The company is expanding its refinery capacity from existing 13mmtpa to 16.2mmtpa by the end of FY5. Though, we have surplus refinery capacity, the strong refiners margin prevailing throughout the world is making refinery attractive, even if the company has to export its surplus. Despite the recent cut in custom duties on petroleum products, refineries are expected to register high GRMs on back of continued favorable crude/ product prices, which augurs well for the company. Retail With the entry of new players and consequent increase in competition the industry dynamics will take a structural shift. The future would involve uncertain margins, change in dealer-distributor loyalty, high customer expectations and competition for experienced manpower. The company is expected to set-up 6 retail outlets during FY5, which will help it consolidate its marketing operations and will also act as an entry barrier for upcoming private and foreign players. Others During the FY4 the company commissioned its Mangalore-Hassan-Bangalore pipeline. The pipeline is being developed on a common carrier principle, which will help company diversify earning streams. The shift towards NG/LNG as cheaper alternate to liquid fuels like naphtha/furnace oil is a cause of concern on two counts, first loss of market sales and second, creation of surplus within the country. The company s definite but small step towards vertical integration will help stabilize volatility in its earnings and secure its input requirements. The company is also exploring farming in opportunities, where it will take a stake in a developed oil field, thus avoiding considerable risk involved in the exploration business. The company is also eyeing lucrative city gas distribution business, which offer great potential considering legislative move towards making all public transport run on cleaner and cheaper CNG (compressed natural gas). September 3, 24 11
Income Statement Period to FY2 FY3 FY4 (Rs in mn) (12) (12) (12) Net Sales 444,57 486,82 515,177 Operating expenses (426,619) (458,192) (483,318) Operating profit 17,951 27,89 31,858 Other income 2,496 3,488 3,794 PBIDT 2,447 31,377 35,652 Interest (2947) (153) (557) Depreciation (522) (5719) (654) Profit before tax (PBT) 12,298 24,128 29,42 Tax (4345) (8744) (1765) Profit after tax (PAT) 7,953 15,384 18277 Extraordinary / prior period items (73) (1) 762 Adjusted profit after tax (APAT) 7,88 15374 1939 Balance Sheet Period to FY2 FY3 FY4 (Rs mn) (12) (12) (12) Sources Share Capital 3,388 3,388 3,389 Reserves 55,589 63,4 74,39 Net Worth 58,977 66,789 77,428 Loan Funds 31,716 13,659 17,8 Def Tax liability 11,731 14, 14,541 Total 12,423 94,448 18,977 Uses Gross Block 13,368 17,543 113,874 Accd Depreciation (37,61) (43,191) (48,93) Net Block 65,767 64,352 65,781 Capital WIP 3,987 3,477 4,961 Total Fixed Assets 69,754 67,829 7,743 Investments 19,984 2,152 2,484 Total Current Assets 6,77 85,486 94,32 Total Current Liabilities (48,1) (79,19) (76,552) Net Working Capital 12,671 6,467 17,75 Intangible Assets 15 - - Total 12,424 94,448 18,977 September 3, 24 12
Cash Flow Statement Period to FY3 FY4 (Rs mn) Net profit before tax and extraordinary items 24,128 29,42 Depreciation 5,719 6,54 Interest expense 1,53 557 Interest income (1,881) (1,513) Dividend income (13) Operating profit before working capital changes 29,484 34,139 Add: changes in working capital (Inc)/Dec in (Inc)/dec in sundry debtors (78) (1,379) (Inc)/dec in inventories (14,969) (2,8) (inc)/dec in other current assets 2 1 Inc/(dec) in sundry creditors 25,951 (4,551) Inc/(dec) in other current liabilities 4,968 2,84 Net change in working capital 15,173 (6,645) Cash from operating activities 44,656 27,494 Less: Income tax (8,744) (1,765) Inc/Dec in Def Tax Asset/liability 2,27 54 Net cash from operating activities 38,182 17,269 Extraordinary inc/(exp) (1) 762 Cash Profit 38,172 18,31 Cash flows from investing activities (Inc)/Dec in fixed assets (3,794) (8,967) (Inc)/Dec in intangible asset 15 (Inc)/Dec in Investments (168) (332) Interest received 1,881 1,513 Dividends received 13 Net cash from investing activities (2,53) (7,786) Cash flows from financing activities Inc/(Dec) in debt (18,56) 3,349 Inc/(Dec) in equity/premium 1 Direct add/(red) to reserves 7 24 Interest expense (1,53) (557) Dividends (7,569) (8,425) (inc)/dec in loans & advances (9,27) (2,853) Net cash used in financing activities (36,175) (8,46) Net increase in cash and cash equivalents (56) 1,785 Cash at start of the year 242 186 Cash at end of the year 186 1,971 Published in September 24. India Infoline Ltd 23-4. India Infoline Ltd. All rights reserved.regd. Off: 24, Nirlon Complex, Off W E Highway, Goregaon(E) Mumbai-4 63. Tel.: +(91 22)5677 59 Fax: 2685 585. This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report. September 3, 24 13