21 June 2021
Update | Sector: Oil & Gas
HPCL
Neutral
BSE SENSEX
52,574
S&P CNX
15,747
CMP: INR303
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Battling a three headed-monster
TP: INR310 (+2%)
Loss of marketing leverage, rising debt, and project execution key risk
HPCL, the darling of deregulation due to its highest leverage to marketing, is soon
going to lose its crown with the addition of 5mmtpa/2mmtpa refining capacity at
Visakhapatnam/
Mumbai by the end of FY22/CY21. Marketing will account for
only 52% of total consolidated EBITDA in FY23E v/s 88% in FY21.
Due to
Visakhapatnam
expansion, Rajasthan greenfield project, and marketing,
consolidated debt is expected to rise to INR641b in FY23E from INR427b in FY21,
1.5x its current market capitalization.
The residual upgradation project (slurry hydrocracker) at Visakhapatnam is of a
relatively new technology, with very few precedents globally. It is likely to take
longer to stabilize, thereby putting pressure on HPCL’s GRMs
.
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
HPCL IN
1,452
429.1/5.8
312 / 163
6/29/-16
1811
2023E
2,675
119.3
63.9
41.9
30.3
281.8
1.3
15.4
6.3
56.6
7.1
1.1
8.5
8.0
(5.5)
Loss of marketing leverage
Financials & Valuations (INR b)
Y/E March
2021 2022E
Sales
2,332 2,691
EBITDA
160.0
93.7
Adj. PAT
106.6
49.0
Adj. EPS (INR)
70.0
32.2
EPS Gr. (%)
192.8 (54.0)
BV/Sh.(INR)
249.8 263.6
Ratios
Net D:E
1.1
1.3
RoE (%)
30.9
12.5
RoCE (%)
14.9
5.6
Payout (%)
31.0
57.2
Valuations
P/E (x)
4.2
9.2
P/BV (x)
1.2
1.1
EV/EBITDA (x)
5.5
10.2
Div. Yield (%)
7.3
6.2
FCF Yield (%)
13.8 (19.3)
Debt to rise to INR641b by FY23E
By FY22-end, HPCL is expected to add 5mmtpa/2mmtpa capacity at
Visakhapatnam/Mumbai, taking its standalone refining capacity in
FY22E/FY23E to 18 mmtpa/22mmtpa.
Combing the commensurate stakes in MRPL (16.95%), HMEL (49%), and the
upcoming Rajasthan refinery (74%), we expect the marketing/refining ratio
to decline to 1.4x/1.1x in FY23E/FY25E from 1.6x in FY21.
Our estimate suggests that contribution of marketing to consolidated
EBITDA would decline to 52% in FY23E from 88% in FY21. This compares
with 43% for BPCL (62% in FY21) and 32% for IOCL (54% in FY21) in FY23E.
Major projects under execution are: 1) the ~INR250b Visakhapatnam
refinery expansion, 2) the ~INR440b greenfield Rajasthan refinery, and 3)
ongoing expansion in marketing and pipelines in addition to the smaller
ones in JVs.
As a result of these projects, we expect consolidated net debt to rise further
to INR566b in FY23E from INR421b in FY21, almost 1.4x its current m-cap.
We expect interest costs to rise to INR13.3b by FY23E from INR9.6b in FY21.
Its most recent and major refinery expansion had taken 1.5-2 years to
stabilize. The Kochi refinery also took almost 1.5 years to completely
stabilize. Expansion at Visakhapatnam is expected to be completed by FY22-
end, while the slurry hydrocracker is likely to come up only by CY22-end.
The above mismatch would result in implied complexity suffering till the
time all units are stabilized, thereby adversely impacting GRMs for
Visakhapatnam.
The slurry hydrocracker itself is a relatively new technology, without a large
number of commercial installations. In fact, a
CY20 paper
highlights only
two commercial installations globally. Lack of sufficient experience in
stabilization of such a complex package is likely to delay stabilization of
Visakhapatnam expansion.
Shareholding pattern (%)
Project execution risk
As On
Mar-21 Dec-20 Mar-20
Promoter
53.5
51.6
51.1
DII
18.9
20.8
21.7
FII
16.3
15.9
17.7
Others
11.3
11.7
9.5
FII Includes depository receipts
Stock Performance (1-year)
HPCL
Sensex - Rebased
375
300
225
150
Swarnendu Bhushan- Research Analyst
(Swarnendu.Bhushan@MotilalOswal.com
Sarfraz Bhimani - Research Analyst
(Sarfraz.Bhimani@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 www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.