13 November 2014
2QFY15 Results Update | Sector:
Oil & Gas
HPCL
BSE SENSEX
27,941
Bloomberg
Equity Shares (m)
M.Cap. (INR b) / (USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
8,358
HPCL IN
338.6
183.5/3.0
589/199
7/19/81
CMP: INR542
TP: INR637
Buy
Financials & Valuation (INR Million)
Y/E MAR
Sales
EBITDA
Adj. PAT
Adj. EPS
(INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA
( ) Yield
Div.
( )
11.0
1.1
8.8
2.7
8.5
1.0
6.4
3.5
7.9
1.0
5.8
3.8
2015E
2,046
42.1
16.8
49.4
-3.3
475
10.8
6.6
35.0
2016E
2,121
50.6
21.6
63.7
28.8
516
12.9
8.3
35.1
2017E
2,169
54.2
23.1
68.2
7.0
560
12.7
9.0
35.2
Above estimate led by inventory gain:
HPCL reported 2QFY15 EBITDA at
INR15.5b (est. INR5.4b) led by (a) inventory gain of INR6.4b, (b) nil subsidy
sharing (est. INR5b); partly negated by (c) forex loss of INR1.1b. PAT stood at
INR8.5b (est INR540m) boosted by lower depreciation at INR3.9b (v/s INR5.9b
in 1QFY15) led by lower depreciation rates as per Companies Act 2013.
OMC’s received full compensation for 2QFY15 under recoveries:
HPCL’s
2QFY15 gross under recovery stood at INR52b, of which govt. shared INR14b
(27%), upstream shared INR37b (73%) leading to nil sharing. Similar to previous
years, quarterly subsidy sharing is ad-hoc and for full year FY15 we model
govt./upstream/OMC’s share at 60%/ 37%/3% v/s 51%/ 48%/ 2% in FY14.
2QFY15 GRM at USD2.1/bbl:
2QFY15 reported GRM stood at USD2.1/bbl (v/s
USD3.8/bbl in 2QFY14 and USD2/bbl in 1QFY15). Adventitious inventory gain
(v/s loss reported by IOCL and BPCL) stood at INR6.4b (v/s loss of INR1.1b loss in
2QFY14 and INR8.3b in 1QFY15). (Refer exhibit 3 and 4 )
Improving cashflow, YTD gross debt down 26%:
HPCL’s gross debt has reduced
sharply by INR83b (26%) led by lower working capital loan due to monthly
diesel price hikes. Gross debt stood at INR236b (v/s INR319b in FY14) includes
long term debt of INR163b and short term debt of INR74b.
Valuation and View
Diesel price hikes and eventual deregulation in Oct-14 is expected to result in
52% reduction in under recoveries by FY16 v/s FY14 to INR674b. For OMC’s,
earnings growth benefit is already seen from reduction in interest cost and now
expect to be driven by higher marketing margin in diesel (similar to petrol). We
model additional diesel margin of INR0.5/ltr in FY16/FY17.
The stock trades at 8.5x FY16E EPS of INR63.7 and 1x FY16E BV. Buy.
(INR Million)
4Q
641,268
4.7
58,730
9.2
-42.3
5,793
1,985
3,958
0
54,910
8,817
16.1
46,092
-40.0
136.0
1Q
591,517
14.3
5,258
0.9
nm
5,897
1,295
2,620
0
685
225
32.8
460
nm
1.4
FY15
2Q
3QE
516,332
456,544
-0.4
-17.6
15,445
9,277
3.0
2.0
52.3
nm
3,880
5,014
1,869
1,654
3,308
2,795
0
0
13,004
5,404
4,502
1,871
34.6
34.6
8,502
3,533
166.6
nm
25.1
10.4
FY14
FY15E
4QE
481,319 2,231,454 2,045,711
-24.9
8.0
-8.3
12,089
52,081
42,069
2.5
2
2
-79.4
-24.3
23.8
5,756
21,884
20,547
1,599
15,046
6,417
1,482
11,004
10,204
0
0
0
6,215
26,155
25,308
1,949
8,817
8,547
31.4
33.7
33.8
4,266
17,338
16,761
-90.7
91.6
-3.3
12.6
51.1
49.4
Quarterly Performance (Standalone)
Y/E March
Net Sales
Cha nge (%)
EBITDA
% of Net Sa l es
Cha nge (%)
Depreci a ti on
Interes t
Other i ncome
Excepti ona l Item
PBT
Ta x
Ra te (%)
PAT
Cha nge (%)
Adj. EPS
E: MOSL Es ti ma tes
1Q
517,639
17.4
-6,879
-1.3
nm
5,100
4,668
2,042
0
-14,605
0
0.0
-14,605
nm
-43.1
FY14
2Q
3Q
518,602
553,945
7.0
5.0
10,142
-9,912
2.0
-1.8
-54.9
nm
5,426
5,566
3,962
4,432
2,435
2,570
0
0
3,189
-17,339
0
0
0.0
0.0
3,189
-17,339
-86.3
nm
9.4
-51.1
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Investors are advised to refer through disclosures made at the end of the Research Report.

HPCL
2QFY15 operational highlights
2QFY15 GRM stood at USD2.1/bbl as against USD3.8/bbl in 2QFY14 and
USD2/bbl in 1QFY15.
Product inventory adventitious gain stood at INR6.4b (v/s INR1.1b loss in
2QFY14 and INR8.3b loss in 4QFY14).
Refinery throughput stood at 4.5mmt, up 32% YoY and 30% QoQ. Sharp increase
is due to maintenance shutdowns comparable quarters.
Marketing volumes at 7.4mmt was up 2% YoY and down 12% QoQ. Sequential
decline is led by seasonal factors like monsoon.
Exhibit 1: HPCL: 2QFY15 operational highlights
Source: Company, MOSL
Exhibit 2: HPCL: 2QFY15 GRM at USD2.1/bbl (USD/bbl)
HPCL GRM
16.5
6.4
7.7 7.0 8.1
6.3 7.4
5.8
9.5
5.5
5.5
5.1
1.1 1.9
2QFY12
7.3
8.6
9.1
8.7
8.5 9.1 7.6 7.5
6.7
6.6
6.3
5.4 4.3 6.2 5.8 4.7
4.8
3.7
(2.1)
2QFY11
2QFY13
2QFY14
2QFY15
4.4
3.7
2.6
3.8
2.4
4.7
2.0 2.1
Singapore GRM
3.6
5.73.2
1.9
4.1
1.8
(0.3)
5.0
3.7 4.2
4.2
3.2 3.7 2.7
1.9
2QFY08
(4.7)
(3.1)
2QFY09
2QFY10
Source: Company, MOSL
Exhibit 3: Adventitious gains and losses trend similar for all
three OMC’ on annual basis (INRb)
Exhibit 4: ..however trend varies on quarterly basis as seen
in the current quarter (INRb)
Source: Company, MOSL
Source: Company, MOSL
13 November 2014
2

HPCL
Other Key Highlights
In 2QFY15, HPCL’s gross under recoveries stood at INR51.6b, which was fully
compensated by upstream (INR37.5, 73%) and govt. (INR14b, 27%).
For FY15 and FY16, we model downstream subsidy sharing at ~3%.
Exhibit 5: HPCL reported nil under recoveries sharing led by full compensation from govt and upstream companies
Source: Company, MOSL
Exhibit 6: Ad-hoc subsidy sharing resulting in volatile quarterly profits
PAT
Net (under)/over recovery
2QFY08
2QFY09
2QFY10
2QFY11
2QFY12
2QFY13
2QFY14
2QFY15
Source: Company, MOSL
Exhibit 7: Diesel price hikes leading to de-regulation since Jan-13 has led to significant debt
and interest cost reduction (INRb)
Gross Debt
400
300
200
100
0
2QFY09
2QFY10
2QFY11
2QFY12
2QFY13
2QFY14
2QFY15
Interest Cost (trailing 4 qtrs - RHS)
24
18
12
6
-
Source: Company, MOSL
13 November 2014
3

HPCL
Exhibit 8: We model ~3% 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.
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 INR0.5-1/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 model additional diesel margin of INR0.5/ltr in FY16/FY17.
We value HPCL on FY16E at INR637, based on average of (a) 6x EV/EBITDA; (b)
1.2x P/B and c) 10x P/E and investment value (INR165/sh, post 25% discount).
The stock trades at 8.5x FY16E EPS of INR63.7 and 1x FY16E BV. Buy.
13 November 2014
4

HPCL
Story in charts
Exhibit 1: HPCL’s GRMs have underperformed Singapore
GRM (USD/bbl)
Prem/(Disc) to Singapore
Singapore GRM
8.2
7.7
5.8
5.2
3.6
4.5
5.2
5.2
3.0
2.1
(0.6) (0.6) (0.7)
(3.0)
(5.6)
FY09
FY11
FY13
HPCL Blended GRM
5.6
3.4
(2.2)
6.0
6.0
25
2.4
(3.1)
2.8
(3.2)
3.3
(2.7)
17
16
16
16
16
15
16
17
17
26
Exhibit 2: While refining capacity has been largely flat,
marketing sales have shown steady increase
Marketing Sales (mmt)
29
30
Refinery Throughput (mmt)
34
33
32
31
5.5
27
FY15E
FY17E
FY09
FY11
FY13
FY15E
FY17E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: HPCL FY14 EBITDA and PAT boosted by product
inventory gains and lower interest cost
EBIDA (INRb)
52
33
25
17
6
FY09
13
15
FY11
9
9
17
34
39
42
23
PAT (INRb)
51
54
Exhibit 4: Expect D/E ratio to decline with increasing
profitability (x)
D/E Ratio
2.1
1.8
2.0
2.3
2.4
2.1
1.6
1.2
29
22
1.1
FY13
FY15E
FY17E
FY09
FY11
FY13
FY15E
FY17E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Diesel deregulation to reduce working capital
leading to lower interest costs
21
Total Debt (INRb)
17
18
15
Interest Cost (INRb)
Exhibit 6: HPCL: 1 Year Forward P/B Chart
9
9
6
298
325
FY13
319
255
FY15E
5
215
5
200
FY17E
228
FY09
213
250
FY11
Source: Company, MOSL
Source: Company, MOSL
13 November 2014
5

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.
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.
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.
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 (~48% reduction
in under recoveries in FY16 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.
Recent developments
HPCL plans to setup an underground LPG storage
facility at Mangalore.
Govt. deregulated diesel in October 2014.
Valuation and view
The stock trades at 8.5x FY16E EPS of INR63.7 and 1x
FY16E BV. 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.
Target
Price (INR)
637
Upside
(%)
17.5
Reco.
Buy
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
49.4
63.7
Consensus
Forecast
45.2
58.5
Variation
(%)
9.4
8.8
Target price and recommendation
Current
Price (INR)
542
Shareholding pattern (%)
Sep-14
Promoter
DII
FII
Others
51.1
20.1
14.0
14.8
Jun-14
51.1
20.6
12.5
15.8
Sep-13
51.1
22.4
9.3
17.2
Stock performance (1-year)
Note: FII Includes depository receipts
13 November 2014
6

HPCL
Financials and valuation
13 November 2014
7

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