Company update | Sector: Oil & Gas
12 Annual Global Investor Conference
BSE Sensex
29,045
S&P CNX
8,953
th
HPCL
Buy
CMP: INR1,252
TP: INR1,490 (+19%)
Mr. Mukesh Kumar Surana
Chairman & Managing Director
Hindustan Petroleum Corporation
CEO TRACK
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
12M Avg Val (INR M)
Free float (%)
HPCL IN
339
1,329/636
-8/55/49
424.4
6.4
1,196
48.9
Gearing to leverage domestic growth in deregulated era
Takeaways from CEO track
We hosted Mr. M K Surana, CMD of HPCL, at our 12th AGIC in Mumbai. Following
are the key takeaways from his presentation.
India’s petroleum consumption on strong footing, although mix could change
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.
62% refining capacity addition required; government policy supportive
India’s refining capacity stands at 230mmt and net of exports capacity at
203mmt. With the expected consumption growth, India will need at least
130mmt of additional refining capacity over the next 10-15 years.
Government policy has been supportive with auto fuel (petro land diesel)
deregulation and LPG DBTL (direct benefit transfer). Further, the government is
trying to implement DBTL for PDS kerosene with pilot projects already
underway.
OMCs’ balance sheet and return ratios strengthened post diesel deregulation as
it lowered their debt and offered retail petroleum pricing freedom.
HPCL well placed; focus on capacity addition and efficiency improvement
HPCL is targeting 85% product self-sufficiency (refining/marketing volume ratio)
in the long term, as against ~50% currently (~63% with Bhatinda JV share),
through refinery capacity addition in its own and JV refineries.
Financial Snapshot (INR b)
Y/E Mar
2016 2017E 2018E
Sales
1,793 1,833 1,914
EBITDA
76.2 88.8
93.9
Adj. PAT
38.6 45.2
48.1
Adj.EPS (INR) 113.9 133.4 142.0
EPS Gr. (%)
41.3 17.1
6.4
BV/Sh.(INR)
546.2 632.8 725.0
RoE (%)
22.4 22.6
20.9
RoCE (%)
11.4 12.0
11.4
Payout (%)
35.4 35.1
35.1
Valuations
P/E (x)
11.0
9.4
8.8
P/BV (x)
2.3
2.0
1.7
EV/EBITDA x)
6.6
5.6
5.4
Div. Yield (%)
2.8
3.2
3.4
Relative to Index
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 6129 1529
September 2016
Abhinil Dahiwale
(Abhinil.Dahiwale@motilaloswal.com); +91 22 3980 4309
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

HPCL
12 Annual Global Investor Conference
th
HPCL has started dynamic pricing (based on location, demand and competition)
for auto fuels, which should help the company to sweat marketing assets better
and improve profitability.
HPCL plans capex of INR558b over FY16-21, which includes ~INR257b for
refineries, ~INR262b for marketing, and the remaining for renewables, R&D and
JV projects.
Refinery capex of INR257b includes INR42b for Euro VI upgradation and for
brownfield expansions (a) at Vizag from 8.3 to 15mmt (~INR208b) along with up-
gradation, (b) at Mumbai from 6.5 to 9.5mmt (INR42b) and (c) at JV Bhatinda
refinery from 9 to 11.3mt (INR24b).
Expects overall GRM to improve ~USD1.5-2/bbl. (a) Vizag to complete by April
2020 and expand GRM by USD4-5/bbl, (b) Mumbai to complete in three years
and expand GRM by USD1-1.5/bbl and (c) Bhatinda by Jun-17.
Exhibit 1: 4 key macro-economic trends will drive energy demand and mix
Source: Company, MOSL
September 2016
2

HPCL
12 Annual Global Investor Conference
Exhibit 2: Factors influencing the Indian petroleum industry
th
Source: Company, MOSL
HPCL has 2 largest product pipeline network
nd
Source: Company, MOSL
September 2016
3

HPCL
12 Annual Global Investor Conference
Exhibit 3: HPCL’s on-going Projects
Projects
LPG pipelines
Details
356 km Mangalore – Hassan – Mysore – Bengaluru LPG Pipeline (3.1
MMTPA)
168 km Uran –Chakan LPG pipeline (1.0 MMTPA)
Revamp at Jabalpur Depot (Madhya Pradesh) and Loni Terminal
(Maharashtra),
Nalagarh Depot (Himachal Pradesh).
New LPG Plants at Bhopal (Madhya Pradesh) Karimnagar (Telangana) and
at Panagarh (West Bengal).
Source: Company, MOSL
th
POL Depots
LPG Plants
Exhibit 4: Planned Projects
Type
Projects
Details
−
Expansion of capacity from 6.5 MMTPA to 9.5 MMTPA
−
Salient features:
• Euro VI compliant Petrol & Diesel
• Propylene Manufacturing facilities
• Estimated Capex of INR42b
−
Expansion of capacity from 8.3 MMTPA to 15 MMTPA
−
Salient features:
• Residue up-gradation
• Euro VI compliant Petrol & Diesel
• Estimated Capex of INR208b
−
Extension from Palanpur to Vadodara with a new green field marketing
terminal near Vadodara
−
Approx. Cost : INR19b
−
Visakh Vijayawada
Secunderabad Pipeline
(VVSPL Phase II)
−
−
−
−
−
Capacity expansion from 5.38 MMTPA to 8 MMTPA for evacuation post
Visakh Refinery Expansion
Extension of VVSPL from Vijayawada to Dharmapuri in Tamilnadu (628 Km)
with a new green field terminal at Dharmapuri
Approx. Cost : INR30b
Haldia (West Bengal) Varanasi (UP) and Sagauli (Bihar)
Bilaspur (Chhattisgarh), Leh ( J&K) and Revamp at Meerut ( UP)
Lube Blending Plants at Mumbai (Maharashtra) & Kasna (UP)
Source: Company, MOSL
Mumbai Refinery
Expansion of Refineries
Visakh Refinery
Mundra-Delhi
(MDPL Phase II)
New POL Pipeline Projects
LPG Plants
New Marketing Projects
POL Depots
Lube Blending Plants
September 2016
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HPCL
12 Annual Global Investor Conference
Exhibit 5: High volume highway location contributes to 51% of HPCL’s retail outlet
locations
HPCL’s market share
amongst PSUs is gradually
increasing in marketing and
retail aspects; at 25.8% in
Mar’16 from 25.2% in
Dec’15
Lubricants market share has
increased by 2.6% in FY16
th
Source: Company, MOSL
Exhibit 6: Industry level gross under recoveries have come down sharply; LPG shifted to DBTL (INRb)
Gross under recoveries
HPCL + BPCL + IOCL (INRb)
436
406
70
325
87
66
215 65
78
73
63
299 60
187 241
92
-
-
-
-
1Q
2Q
3Q
4Q
Petrol
478
115
73
290
-
1Q
378
70
71
236
-
2Q
393
110
77
207
-
3Q
362
105
75
182
-
4Q
254
85
64
105
-
1Q
354
93
75
186
-
2Q
398
127
85
185
-
3Q
393
159
82
152
-
4Q
287
121
75
90
-
1Q
224
125
73
26
-
2Q
Diesel
PDS Kerosene
Domestic LPG
Total
159
103
64
-
(7)
3Q
53
17
36
-
4Q
87
49
39
-
1Q
72
40
32
-
2Q
61
33
29
-
3Q
55
40
16
-
4Q
52
28
24
-
1Q
FY17
FY12
FY13
FY14
FY15
FY16
Source: PPAC, Industry, MoPNG
September 2016
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HPCL
12 Annual Global Investor Conference
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Valuation and view
Widening Moat:
OMCs’ economic moat is widening, led by (1) scope for
meaningful increase in marketing margins and profitability, (2) slower ramp-up
by private marketers, (3) high volume growth, aided by expected GDP boost,
and (4) improving balance sheet with increasing cash flow.
OMCs profit normalization was delayed for a decade:
OMC’s deregulation and
in turn their profit normalization had been derailed for a decade after an earlier
brief de-regulation period in 2004-06. However, this time around we believe
government will stay put with its deregulation decision given the hard lessons of
financial stress of last decade. Increased excise duties offer some flexibility to
moderate prices in event of spike in oil prices, but huge and growing India
consumption volumes will make it practically impossible to again revisit the
price control model.
Marketing division to drive profitability:
Post de-regulation, we expect
marketing division profitability to grow rapidly, hence should also command a
higher valuation. An INR0.5/ltr increase in petrol and diesel marketing margins
increases HPCL’s FY18E EPS by 22%. We model gross per liter diesel margin of
INR1.6/230 in FY17/FY18.
Pure play marketing companies trade at higher valuations:
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.
We 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.
Exhibit 7: HPCL – Key Assumptions
Exchange Rate (INR/USD)
Brent Crude (USD/bbl)
Market Sales (MMT)
YoY (%)
GRM (USD/bbl)
HPCL Blended GRM
Reuters Singapore GRM
Prem/(disc)
Refining capacity utilization (%)
Total Refinery throughput (MMT)
YoY (%)
Pipeline throughput (mmt)
Net subsidy sharing
Net sharing (%)
FY09
45.8
84.8
25.4
3.8%
5.17
5.75
(0.58)
118%
16.5
-1.5%
10.6
(0.0)
0%
FY10
47.5
69.6
26.3
3.5%
2.97
3.55
(0.58)
116%
16.3
-1.5%
12.0
12.3
12%
FY11
45.7
86.5
27.0
2.9%
4.47
5.18
(0.70)
106%
15.8
-3.1%
13.0
15.1
9%
FY12
47.9
114.5
29.5
9.1%
5.20
8.17
(2.96)
99%
16.1
1.9%
13.6
0.1
0%
FY13
54.5
110.6
30.3
2.8%
2.08
7.70
(5.62)
98%
15.8
-1.4%
13.8
2.3
1%
FY14
60.6
107.8
31.0
2.1%
3.43
5.62
(2.19)
95%
15.4
-2.6%
15.7
4.8
1%
FY15
61.1
86.0
32.0
3.2%
2.84
6.36
(3.52)
101%
16.4
6.3%
14.9
5.0
3%
FY16
65.5
47.6
34.2
7.1%
6.67
7.49
(0.82)
106%
17.2
5.1%
14.9
0.1
0%
FY17E
68.0
50.0
36.1
5.5%
5.25
5.50
(0.25)
110%
17.9
3.8%
14.9
-
0%
FY18E
70.0
55.0
38.1
5.5%
6.00
6.50
(0.50)
110%
17.9
0.0%
14.9
-
0%
Source: Company, MOSL
September 2016
6

HPCL
12 Annual Global Investor Conference
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Story in charts
Exhibit 8: HPCL’s GRMs have underperformed Singapore
GRM (USD/bbl)
Prem/(Disc) to Singapore
Singapore GRM
7.7
8.2
5.6
5.2
4.5
(0.7)
5.2
2.1
(3.0)
FY12
(5.6)
FY13
FY14
3.4
(2.2)
HPCL Blended GRM
6.4
7.5
6.7
2.8
(3.5)
FY15
(0.8)
5.5
5.3
(0.3)
6.5
6.0
(0.5)
26
27
29
Exhibit 9: While refining capacity has been largely flat,
marketing sales have shown steady increase
Marketing Sales (mmt)
Refinery Throughput (mmt)
38
36
34
32
3.6
3.0
(0.6)
30
31
17
FY10
16
FY11
16
FY12
16
FY13
16
FY14
15
FY15
16
17
18
FY10
FY11
FY16 FY17E FY18E
Source: Company, MOSL
FY16 FY17E FY18E
Source: Company, MOSL
Exhibit 10: Expect EBITDA to be driven up higher marketing
margins
EBITDA (INRb)
PAT (INRb)
89
76
52
25
13
FY10
33
34
39
9
15
FY11
9
FY12
FY13
17
FY14
27
54
39
45
48
94
Exhibit 11: Expect D/E ratio to decline with increasing
profitability (x)
D/E Ratio
1.8
2.0
2.3
2.4
2.1
1.1
0.8
0.8
0.7
FY15
FY16 FY17E FY18E
FY10
FY12
FY14
FY16
FY18E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 12: Diesel deregulation to reduce working capital
leading to lower interest costs
Total Debt (INRb)
17
9
9
18
15
7
298
FY12
325
FY13
319
FY14
171
FY15
Interest Cost (INRb)
Exhibit 13: HPCL: 1 Year Forward P/E Chart
27
22
17
9.1
2.6
PE (x)
Peak(x)
Avg(x)
24.6
Min(x)
6
145
6
177
7
177
12
7
2
9.2
213
FY10
250
FY11
FY16 FY17E FY18E
Source: Company, MOSL
Source: Company, MOSL
September 2016
7

HPCL
12 Annual Global Investor Conference
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Financials and Valuations
Income Statement
Y/E March
Net Sales
Finished Goods
Raw Materials Cons
Employee cost
Other Exp
EBITDA
% of Net Sales
Depreciation
Interest
Other Income
Extraordinary Items (net)
PBT
Tax
Total Rate (%)
PAT
Adjusted PAT
% of Net Sales
Change (%)
2012
1,781,392
1,093,707
561,189
15,831
76,583
34,082
1.9
17,129
16,977
12,222
-5
12,192
3,077
25.2
9,115
9,115
0.5
-40.8
2013
2,065,293
1,281,786
639,921
25,256
78,907
39,424
1.9
19,315
18,377
12,300
714
14,746
5,699
38.6
9,047
9,047
0.4
-0.7
2014
2,231,454
1,451,380
613,881
20,303
93,809
52,081
2.3
21,884
15,046
11,004
0
26,155
8,817
33.7
17,338
17,338
0.8
91.6
2015
2,063,804
1,292,784
599,079
24,147
93,618
54,176
2.6
19,712
7,066
14,142
0
41,541
14,209
34.2
27,333
27,333
1.3
57.6
2016
1,792,811
1,159,484
407,012
23,145
127,001
76,168
4.2
26,668
6,401
14,282
0
57,381
18,753
32.7
38,627
38,627
2.2
41.3
2017E
1,832,519
1,222,719
438,524
26,617
55,832
88,828
4.8
28,346
6,316
13,764
0
67,930
22,694
33.4
45,235
45,235
2.5
17.1
(INR Million)
2018E
1,914,292
1,221,824
526,373
32,739
39,506
93,850
4.9
30,894
6,738
15,614
71,831
23,704
33.0
48,127
48,127
2.5
6.4
(INR Million)
2018E
3,390
242,376
245,766
177,320
58,929
482,015
645,493
277,029
368,464
58,000
115,694
283,076
140,354
45,162
33,865
60,064
3,632
343,220
317,123
26,097
-60,144
482,015
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Deferred Tax
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr. Assets, L & Adv.
Inventory
Debtors
Cash & Bank Balance
Loans & Advances
Other Current Assets
Current Liab. & Prov.
Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2012
3,390
127,835
131,225
298,312
30,853
460,390
334,590
126,094
208,496
44,445
103,705
354,427
194,545
35,652
2,264
116,484
5,483
250,683
230,847
19,836
103,744
460,390
2013
3,390
133,874
137,264
324,583
35,984
497,830
370,062
144,575
225,487
51,729
106,269
378,962
164,387
49,350
1,471
160,008
3,745
264,617
241,622
22,995
114,345
497,830
2014
3,390
146,732
150,122
319,301
39,084
508,506
424,668
165,545
259,122
45,856
108,598
362,204
187,754
54,660
347
114,693
4,750
267,275
243,978
23,296
94,930
508,506
2015
3,390
156,831
160,221
170,556
41,036
371,813
481,749
191,121
290,628
34,744
112,415
237,719
129,723
36,031
171
67,364
4,432
303,693
273,903
29,790
-65,974
371,813
2016
3,390
181,775
185,165
145,220
48,105
378,490
541,493
217,789
323,705
30,000
109,947
241,865
127,091
42,296
1,483
67,364
3,632
327,027
305,459
21,568
-85,162
378,490
2017E
3,390
211,145
214,535
177,320
51,745
443,601
615,493
246,135
369,358
8,000
115,694
286,035
136,524
43,232
42,584
60,064
3,632
335,487
311,763
23,725
-49,452
443,601
September 2016
8

HPCL
12 Annual Global Investor Conference
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Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E
Cash P/E
EV / EBITDA
EV / Sales
Price / Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios
Debtors (No. of Days)
Asset Turnover (x)
Leverage Ratio
Debt / Equity (x)
2012
26.9
77.4
387.1
8.5
37.0
46.6
16.2
19.0
0.4
3.2
2013
26.7
83.7
404.9
8.5
37.3
46.9
15.0
17.2
0.3
3.1
0.7
6.7
4.2
3.8
7.5
5.9
2.4
2014
51.1
115.7
442.8
15.5
35.5
24.5
10.8
12.9
0.3
2.8
1.2
12.1
5.4
5.8
8.5
5.6
2.1
2015
80.6
138.8
472.6
24.5
35.6
15.5
9.0
9.7
0.3
2.6
2.0
17.6
7.3
7.8
8.0
4.6
1.1
2016
113.9
192.6
546.2
34.5
35.4
11.0
6.5
6.6
0.3
2.3
2.8
22.4
11.4
14.4
8.0
3.5
0.8
2017E
133.4
217.0
632.8
40.0
35.1
9.4
5.8
5.6
0.3
2.0
3.2
22.6
12.0
15.7
8.5
3.2
0.8
2018E
142.0
233.1
725.0
42.6
35.1
8.8
5.4
5.4
0.3
1.7
3.4
20.9
11.4
15.3
8.4
3.0
0.7
7.1
5.0
4.5
6.4
5.6
2.3
Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Other op
Interest Paid
Direct Taxes Paid
(Inc)/Dec in Wkg. Capital
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free Cash Flow
(Pur)/Sale of Investments
Inc from Invst
CF from Inv. Activity
Inc / (Dec) in Debt
Interest paid & other Inv
Dividends Paid
CF from Fin. Activity
Inc / ( Dec) in Cash
Add: Op. Balance
Bank Balance Adj.
Closing Balance
E:MOSL Estimates
2012
12,192
17,129
-5,407
21,392
-2,715
-27,301
15,291
-41,359
-26,068
6,378
6,345
-28,636
37,919
-14,836
-5,509
17,574
4,229
800
-2,766
2,264
2013
14,746
19,344
-10,771
20,193
-1,072
-30,945
11,496
-36,807
-25,312
-2,404
5,505
-33,706
37,072
-22,187
-3,344
11,540
-10,670
2,264
9,877
1,471
2014
26,155
21,884
-1,556
13,364
-3,668
21,121
77,301
-41,358
35,943
-1,297
4,906
-37,748
-25,648
-17,045
-3,367
-46,060
-6,507
1,471
5,383
347
2015
41,541
19,712
-6,772
7,066
-7,622
124,486
178,411
-41,762
136,649
4,161
4,688
-32,913
-123,807
-7,647
-6,136
-137,590
7,908
347
-8,084
171
2016
57,381
26,668
-5,536
6,401
-11,685
20,500
93,729
-55,000
38,729
2,468
5,536
-46,996
-25,336
-6,401
-13,684
-45,421
1,312
171
0
1,483
2017E
67,930
28,346
-7,711
6,316
-19,053
5,391
81,218
-52,000
29,218
-5,748
7,711
-50,037
32,100
-6,316
-15,865
9,919
41,101
1,483
0
42,584
(INR Million)
2018E
71,831
30,894
-9,006
6,738
-16,521
1,973
85,910
-80,000
5,910
0
9,006
-70,994
0
-6,738
-16,896
-23,634
-8,718
42,584
0
33,865
September 2016
9

HPCL
12 Annual Global Investor Conference
th
September 2016
10