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.