Mumbai 2014 Sep V: Hindustan Petroleum’s (HPCL) Q1FY15 profit of
INR460mn came much below our estimate due to disappointing GRM of USD2.04/bbl
and inventory losses of INR8.3bn. However, 72% YoY dip in interest cost was a
key positive which helped deliver
INR460mn PAT. We expect the company’s overall subsidy burden to dip 30% YoY
during FY15E, reducing working capital requirements further. At the current
INR0.5/litre hike in prices, diesel under-recovery at INR1.33/litre is 3 months
away from potentially being freed completely. Amongst the concerned PSUs, HPCL
is the most leveraged to downstream reforms.
In line performance…
• HPCL
reported its Q1FY15 numbers with revenues at | 59215.8 crore due to lower cash
compensation from the government
• HPCL
reported a 14.4% YoY increase in revenue to | 59215.78 crore, marginally below
our estimate of | 60447.7 crore. EBITDA at | 589.8 crore came below our
estimate of | 1322.1 crore due to higher-than- expected net subsidy burden of |
494.9 crore vs. estimated | 120.3 crore and marginally lower GRMs
•
Subsequently, PAT during the quarter declined 103.2% YoY to | 46.0 crore, below
our estimate of | 404.8 crore. However, net of subsidy, the PAT was in line
with our expectation
Rupee appreciation & price hikes reduce
diesel losses
The
government’s positive move in H1CY13 to allow OMCs to hike diesel prices by 50
paise/month has been a major step to bring down the diesel under-recovery. The
recent rupee appreciation and consistent diesel price hikes have brought down
diesel losses from ~| 8/litre in January 2014 to the current levels of ~|
1.33/litre. Given our assumptions of Brent crude at $110/barrel and exchange
rate of | 60 per US dollar, we expect gross under-recovery of | 1,04,836.7
crore and | 87,109.9 crore in FY15E and FY16E, respectively. If the current
trend continues, we expect the diesel under-recovery to become nil in FY16E.
GRM lower than estimates a concern, lower
finance cost positive
HPCL
reported GRMs of $2.0/barrel in Q1FY15 (our expectation: $2.8/barrel). We
estimate GRM of $2.6 and $ 2.8 per barrel for FY15E and FY16E, respectively. We
estimate throughput of 15.9 MMT and 16.8 MMT for FY15E and FY16E, respectively.
HPCL’s interest costs continue to decline – down 35% QoQ to | 130 crore, as
cash compensation from the government in phases. We expect an improvement in
HPCL’s working capital efficiencies, as diesel losses decline (on regular price
hikes and INR appreciation). With the decline in diesel losses, the working
capital scenario is expected to improve. This is expected to lead to a
reduction in interest cost from | 1504.6 crore in FY14 to | 1042.6 crore in
FY16E. Aggressive plans ahead
Bhatinda
refinery, a part of HPCL’s JV Company, HMEL, had reported losses of ~ | 3000
crore in FY14. The refinery is expected to report profit in the next two years.
The company has aggressive plans of setting up a greenfield refinery in
Rajasthan of a capacity of 9 MMTPA. Besides this, the company also has plans to
expand the Mumbai refinery plan to 10 MMTPA and Vizag refinery to 15 MMTPA over
the next three to four years. Even though the decline in fuel subsidies may
improve earnings visibility, the capex plans are expected to have an adverse
impact on RoEs in the medium term. The new government is yet to formalise a
mechanism of regular compensation for OMCs, maintaining status quo mechanism of
delayed cash payments. Any change in this could improve RoEs for all oil
marketing companies. We have a BUY recommendation on the stock with a target
price of | 448 (average of P/BV multiple: | 421/share and P/E multiple: | 474
per share).
Recognizing
marketing and distribution network as one of the pillars of success , a number
of infrastructure projects have been taken up for capacity expansion i.e.,
Mounded LPG Storage and Jetty Facility at MLIF , Mangalore; New LPG Bottling
Plants at Solapur, Bhopal and Bangalore increasing the storage capacity to
about 130 TMT and bottling capacity to 5 MMTPA; New POL Depots at Bokaro, Bihta
and Kadapa and Revamping of POL terminals at Paradeep and Budge Budge.
Four
new product pipelines are currently under implementation – i) Rewari – Kanpur
ii) Awa – Salawas iii) Uran – Chakan / Shikrapur for LPG iv) Mangalore – Hassan
– Mysore for LPG, at a total cost of Rs.2277 crores.. The physical progress
achieved in all these pipelines as of March, 2014, are on schedule.
The
company has started making its footprints in the Natural Gas segment, and in
this regard has initiated the project activities for setting up a 5 MMTPA LNG
terminal at Chhara, Gujarat in a JV partnership with M/s S P Ports Pvt Ltd.
In
Exploration & Production, M/s Prize Petroleum, wholly owned subsidiary of
HPCL has signed a Sale Purchase Agreement with M/s AWE, Australia to acquire
stake in two natural gas blocks in Australia, viz., 11.25% participating
interest in a producing field “Yolla” and 9.75% interest in a discovered, to be
developed field “Trefoil” for a total consideration of AUD 85 Million.
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