11 August 2014
1QFY15 Results Update | Sector:
Oil & Gas
HPCL
BSE SENSEX
25,519
Bloomberg
Equity Shares (m)
M.Cap. (INR b) / (USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
7,626
HPCL IN
338.6
138.5/2.3
463/158
7/38/83
CMP: INR409
TP: INR490
Buy
Financials & Valuation (INR Million)
Y/E Mar
Net Sales
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (X)
2015E
39,901
11,036
32.6
-36.3
7.3
3.2
12.5
0.9
2016E
45,157
12,546
37.0
13.7
483.0
7.9
4.5
11.0
0.8
2017E
47,750
14,615
43.1
16.5
511.0
8.7
5.1
9.4
0.8
2,165,3142,171,6582,133,378
BV/Sh.(INR) 459.0
PAT above estimates led by lower interest expense:
HPCL reported 1QFY15
EBITDA at INR5.3b impacted by (a) lower refining profit and (b) adventitious
loss of INR8.3b; partly compensated by lower net under recovery at INR4.9b
(v/s est of INR6.3b).
However, PAT was above estimate at INR460m (est. loss of INR-1.6b) boosted
by significantly lower interest cost at INR1.3b (est. INR4b; -72% YoY, -35%
QoQ) due to absence of MTM forex loss on borrowings. Comparable PAT was
at loss of INR-14.6b in 1QFY14 and profit of INR46b in 4QFY14.
Gross debt stood at INR243b (v/s INR319b in FY14) includes long term debt of
INR155b and short term debt of INR88b.
Ad-hoc quarterly subsidy, model 2% share for full year:
HPCL’s 1QFY15 gross
under recovery stood at INR66b (23% of combined INR287b for three OMC’s),
of which govt. shared INR25b (38%), upstream shared INR36b (55%) leading
to net HPCL’s share of INR4.9b (7%). Similar to previous years, 1QFY15 subsidy
sharing is ad-hoc and for full year FY15 we model govt./upstream/OMC’s
share at 34%/ 64%/ 2% v/s 51%/ 48%/ 2% in FY14.
1QFY15 GRM at USD2.0/bbl:
1QFY15 reported GRM stood at USD2.0/bbl (v/s
USD2.6/bbl in 1QFY14 and USD4.7/bbl in 4QFY14). Adventitious inventory
loss stood at INR8.3b (INR4b loss in 1QFY14 and INR4.5b gain in 4QFY14).
Valuation and View
Ongoing reforms have the potential to transform OMCs to a structural
investment play in our view led by higher earnings predictability, increase in
profitability leading to higher RoE’s.
Likely diesel deregulation could cut under recoveries by ~51% in FY17 over
FY14. For OMC’s, earnings growth would be from reduction in interest cost
followed by likely large delta in diesel marketing margins post deregulation.
INR0.5/ltr increase in diesel marketing margin increases HPCL’s FY16E EPS by
~40%.
The stock trades at 11.1x FY16E EPS of INR37 and 0.8x FY16E BV. Buy.
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Nitish Rathi
(Nitish.Rathi@motilaloswal.com); +91 22 3982 5558
Investors are advised to refer through disclosures made at the end of the Research Report.

HPCL
Other Key Highlights
In 1QFY15, HPCL’s gross under recoveries stood at INR66b of which upstream
compensated INR36b (55%), govt. compensated INR25b (38%) and the rest
INR4.9b (7%) had to be borne by HPCL.
For FY15 and FY16, we model downstream subsidy sharing at ~2%.
HPCL reported net under recovery in 1QFY15 at INR4.9b (7%)
Source: Company, MOSL
1QFY15 operational highlights
1QFY15 GRM stood at USD2/bbl as against USD2.6/bbl in 1QFY14 and
USD4.7/bbl in 4QFY14.
Product inventory adventitious loss stood at INR8.3b (v/s INR4b loss in 1QFY14
and INR4.5b gain in 4QFY14).
Refinery throughput stood at 3.3mmt, down 5% YoY and 25% QoQ, impacted by
shutdown at Vizag and Mumbai.
Marketing volumes at 8.3mmt was up 4% YoY and 3% QoQ.
HPCL: 1QFY15 operational highlights
Source: Company, MOSL
Ad-hoc subsidy sharing resulting in volatile quarterly profits
PAT
Net (under)/over recovery
HPCL: 1QFY15 GRM at USD2/bbl (USD/bbl)
HPCL GRM
9.1
3.7 4.2
3.7
2.7
8.6
8.5
7.3
5.5
5.1
1.1
1.9
-2.1
1QFY13
7.5
6.7
9.1
6.3
4.4
1.9
Singapore GRM
8.7
6.6
5.4
4.0
2.2
6.2 5.8
4.3
4.7
2.0
7.6
4.8
3.7
3.7
2.6
1QFY11
1QFY12
1QFY13
1QFY14
1QFY15
1QFY11
1QFY12
1QFY14
1QFY15
Source: Company, MOSL
Source: Company, MOSL
11 August 2014
2

HPCL
We model ~2% subsidy sharing by OMC’s in FY15/FY16
Source: PPAC, MoPNG, MOSL
Valuation and view
Ongoing reforms have the potential to transform OMCs to a structural
investment play in our view led by higher earnings predictability, increase in
profitability leading to higher RoE’s.
Our positive stance on the stock is driven by likely diesel deregulation in coming
months, which could under recoveries by ~51% in FY17 to INR689b v/s INR1.4t
in FY14. For OMC’s, in the initial period of reforms, earnings growth would be
from reduction in interest cost which could be followed by likely large delta in
diesel marketing margins post deregulation.
Likely increase in diesel marketing margin:
The next big earnings jump for
OMC’s would come from likely higher marketing margin in Diesel. We believe
that OMC’s could atleast earn additional marketing margin of INR0.5/ltr and
even if private players take market share as high as 15%, on a net basis OMC’s
will benefit. An INR0.5/ltr increase in diesel marketing margin increases HPCL’s
FY16E EPS by 40%.
We value HPCL on FY16E at INR490, based on average of (a) 5.5x EV/EBITDA; (b)
1x P/B and c) 10x P/E and investment value (INR128/sh, post 25% discount). The
stock trades at 11.1x FY16E EPS of INR37 and 0.8x FY16E BV. Maintain Buy.
11 August 2014
3

HPCL
Story in charts
HPCL’s GRMs have underperformed Singapore GRM
(USD/bbl)
Prem/(Disc) to Singapore
7.6
5.6
(2.0)
Singapore GRM
5.8
5.2
(0.6)
3.6
3.0
(0.6)
5.2
4.5
(0.7)
5.2
8.2
HPCL Blended GRM
7.7
5.6
3.4
(2.2)
(5.6)
FY08
FY10
FY12
FY14
FY16E
FY08
6.1
6.1
24
25
26
27
While refining capacity has been largely flat, marketing sales
have shown steady increase
Marketing Sales (mmt)
29
Refinery Throughput (mmt)
30
31
32
33
2.1
2.9
(3.2)
3.3
(2.9)
(3.0)
17
17
16
16
16
16
15
16
16
FY10
FY12
FY14
FY16E
Source: Company, MOSL *Does not include Bhatinda JV
Source: Company, MOSL
HPCL FY14 EBITDA and PAT boosted by product inventory
gains and lower interest cost
EBIDA (INRb)
39
PAT (INRb)
52
40
45
Expect D/E ratio to decline with increasing profitability (x)
D/E Ratio
2.4
2.3
1.8
2.0
29
16
6
11
FY08
33
25
15
13
FY10
34
2.1
1.6
2.1
17
9
9
11
1.6
1.2
13
FY12
FY14
FY16E
FY08
FY10
FY12
FY14
FY16E
Source: Company, MOSL
Source: Company, MOSL
Diesel deregulation to reduce working capital leading to
lower interest costs
Total Debt (INRb)
21
17
8
168
FY08
228
9
9
Interest Cost (INRb)
18
15
9
10
HPCL: 1 Year Forward P/B Chart
213
FY10
250
298
FY12
325
319
FY14
250
190
FY16E
Source: Company, MOSL
Source: Company, MOSL
11 August 2014
4

HPCL
HPCL: an investment profile
Company description
Fortune-500 company, HPCL is a refining and marketing
company in India and also has interests in upstream. It
owns 14.8mmt of refining capacity, split across Mumbai
(6.5mmt) and Vishakapatnam (8.3mmt). It has a crude
and product pipeline network of ~2,400km and sells
~30mmt of petroleum products. HPCL also holds a
16.9% stake in MRPL and 49% stake in 9mmt Bhatinda
refinery. HPCL is a state-owned company, with 51.1%
Government of India (GoI) stake.
Key investment risks
Delay in diesel deregulation, ad-hoc subsidy sharing.
Non-commensurate increase in retail fuel prices as oil
prices rise leads to under-recoveries for the company,
and ad-hoc nature of subsidy sharing impacts profits.
Recent developments
HPCL to setup a 9mmt refinery-cum-petrochemical
complex at Barmer in Rajasthan in JV with state govt
at a capex of ~INR373b.
HPCL plans to setup an underground LPG storage
facility at Mangalore.
Key investment arguments
Diesel reforms to lead to significant cut in under
recoveries: Recently announced diesel reforms (a)
increasing diesel prices by INR 0.5/ltR every month
and (b) Market pricing for bulk buyers; would lead to
a significant cut in under recoveries (~51% reduction
in under recoveries in FY17 over FY14).
HPCL's profitability continues to be determined by
the quantum of under-recoveries and sharing
mechanism, rather than fundamentals.
Medium to long-term growth would come from its
9mmtpa Bhatinda refinery in JV (~50% stake) with
Mittal Energy Investments.
Post de-regulation and subsidy rationalization
HPCL's valuations should benefit due to
improvements in (1) earnings quality, (2) RoCE and
RoE, (3) cash cycle , and (4) debt levels.
Valuation and view
The stock trades at 11.1x FY16E EPS of INR37 and 0.8x
FY16E BV. Maintain Buy.
Sector view
Global economic environment (particularly Europe)
will continue to weigh heavily on refining margins.
While economic outlook continues to remain
uncertain, we expect GRMs to remain range bound.
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
32.6
37.0
Consensus
Forecast
37.3
43.5
Variation
(%)
-12.7
-14.9
Target price and recommendation
Current
Price (INR)
409
Target
Price (INR)
490
Upside
(%)
19.8
Reco
Buy
FY14
FY15
Shareholding pattern (%)
Jun-14
Promoter
DII
FII
Others
51.1
20.6
12.5
15.8
Mar-14
51.1
22.2
10.6
16.1
Jun-13
51.1
23.0
9.9
16.0
Stock performance (1-year)
Notes: FII includes depository receipts
11 August 2014
5

HPCL
Financials and valuation
Income statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
(INR Million)
2014
2015E
2016E
2017E
2,231,45 2,165,31 2,171,65 2,133,37
4
4
8
8
8.0
-3.0
0.3
-1.8
52,081 39,901 45,157 47,750
2.3
1.8
2.1
2.2
21,884 24,478 26,368 28,096
30,197 15,424 18,789 19,654
15,046
8,981
9,875
7,650
11,004 10,220
9,872
9,881
0
0
0
0
26,155 16,663 18,786 21,885
8,817
5,627
6,240
7,270
33.7
33.8
33.2
33.2
17,338 11,036 12,546 14,615
17,338 11,036 12,546 14,615
91.6
-36.3
13.7
16.5
0
0
0
0
17,338 11,036 12,546 14,615
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2014
51.1
115.7
437.9
15.5
35.5
8.0
3.5
0.9
0.1
5.9
3.8
12.1
6.0
4.4
9.3
31.1
0.0
2.1
2015E
32.6
104.8
459.0
9.8
35.2
12.5
3.9
0.9
0.1
5.9
2.4
7.3
3.2
4.5
9.3
30.9
0.0
1.6
2016E
37.0
114.8
483.0
11.1
35.1
11.0
3.5
0.8
0.1
3.5
2.7
7.9
4.5
5.2
9.3
30.8
0.0
1.2
2017E
43.1
126.0
511.0
12.9
35.0
9.4
3.2
0.8
0.1
3.1
3.2
8.7
5.1
5.6
9.3
31.0
0.0
0.9
Balance sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2014
3,390
145,064
148,454
319,000
39,085
506,538
435,291
166,460
268,831
18,000
106,269
385,062
189,876
56,642
12,783
125,762
271,625
249,779
21,845
113,438
506,538
2015E
3,390
152,212
155,603
250,000
40,751
446,353
471,291
190,937
280,354
12,000
106,269
351,003
183,450
54,963
13,422
99,168
303,273
280,335
22,938
47,730
446,353
(INR Million)
2016E
2017E
3,390
3,390
160,356 169,854
163,746 173,244
190,000 150,000
42,629 44,818
396,375 368,062
505,291 535,291
217,305 245,401
287,986 289,890
8,000
8,000
106,269 106,269
305,742 273,404
183,550 181,019
55,124 54,153
29,884
1,048
37,184 37,184
311,623 309,502
287,538 284,213
24,084 25,290
-5,880 -36,098
396,375 368,061
E: MOSL Estimates
Cash flow statement
Y/E Mar
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2014
26,155
21,884
0
15,046
-5,716
12,219
69,588
-31,500
0
0
-31,500
0
-5,583
-15,046
-6,148
-26,776
11,311
1,471
12,783
2015E
16,663
24,478
0
8,981
-3,961
66,346
112,507
-30,000
0
0
-30,000
0
-69,000
-8,981
-3,887
-81,868
639
12,783
13,422
(INR Million)
2016E
18,786
26,368
0
9,875
-4,362
70,073
120,740
-30,000
0
0
-30,000
0
-60,000
-9,875
-4,403
-74,278
16,463
13,422
29,884
2017E
21,885
28,096
0
7,650
-5,081
1,381
53,930
-30,000
0
0
-30,000
0
-40,000
-7,650
-5,116
-52,766
-28,837
29,884
1,048
11 August 2014
6

HPCL
NOTES
11 August 2014
7

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HPCL
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Email:anosh.Koppikar@motilaloswal.com
Email : kadambari.balachandran@motilaloswal.com
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Contact: (+65) 68189233 / 65249115
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Motilal Oswal Securities Ltd
11 August 2014
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
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