Performance beats estimates… • HPCL :: ICICI Securities, link

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Performance beats estimates…
• HPCL reported its Q1FY15 numbers with revenue decline of 0.4%
YoY to | 51688.7 crore on account of lower crude oil prices
• EBITDA at | 1600.1 crore was above our estimate of | 985 crore due
to one off gain of | 640 crore on products. GRMs came at US$2.1 per
barrel in Q2FY15, higher than expected GRMs of US$0.8 per barrel
while throughput came at 4.5 MMT in Q2FY15 vs. 3.9 MMT in
Q2FY14
• Subsequently, PAT during the quarter increased to | 850.21 crore,
above our estimate of | 260.2 crore
Diesel deregulation, lower crude oil prices to reduce under-recoveries
The government’s positive move in H1CY13 to allow OMCs to hike diesel
prices by 50 paise/month was a major step to bring down the diesel
under-recovery. The rupee appreciation and consistent diesel price hikes
over the past few months had brought down diesel losses. Subsequently,
there was an over-recovery in diesel sales. The government took a bold
decision to deregulate diesel prices, which was a major reform step for
OMCs. The move to deregulate diesel prices will lead to a decline in crude
oil gross under-recoveries, with only kerosene and LPG prices under the
regulatory regime. Given our assumptions of Brent crude at $90/barrel
and exchange rate of | 61 per US dollar, we expect gross under-recovery
of | 88,091.5 crore and | 73,978.9 crore in FY15E and FY16E, respectively.
The government recently announced an excise duty hike on petrol and
diesel by | 1.5/litre. We expect OMCs to pass this indirectly to consumers
by adjusting the price revision that is done fortnightly. The government
has also taken a decision to fix the subsidy for LPG at | 20/kg while the
subsidy above this amount will be shared by oil companies. We expect
the decision on the subsidy sharing mechanism to come sooner than
later, given the strong government and political sensitivity of the decision
being the least. We now assume downstream subsidy share of 1% and
0.5% for FY15E and FY16E, respectively, of the total under-recoveries.
Operational performance
HPCL reported GRMs of US$2.1/barrel in Q2FY15 vs. expectation of
US$0.8/barrel due to one off gain of | 640 crore on products. We expect
GRM of $2.3/barrel and $2.8/barrel for FY15E and FY16E, respectively. We
estimate throughput of 16.2 MMT and 16.8 MMT for FY15E and FY16E
respectively. We expect an improvement in HPCL’s working capital
efficiencies on account of diesel price deregulation and decline in crude
oil prices. Though the interest cost increased marginally QoQ from |
129.5 crore to | 186.9 crore, we expect this to improve in future, leading
to an improvement in the working capital scenario. We expect a reduction
in interest costs from | 1504.6 crore in FY14 to | 968.8 crore in FY16E.
Aggressive plans ahead
The Bhatinda refinery, a part of HPCL’s JV Company, HMEL, is expected
to report profits in the next two years. The company has plans to expand
the Mumbai refinery to 10 MMTPA and Vizag refinery to 15 MMTPA over
the next three or four years. The new government is yet to formalise a
mechanism of regular compensation for OMCs, maintaining the status
quo mechanism of delayed cash payments. Any change in this could
improve the RoEs for all oil marketing companies. We have a BUY
recommendation on the stock with a target price of | 626 (average of
P/BV multiple: | 554/share and P/E multiple: | 698 per share)

LINK
http://content.icicidirect.com/mailimages/IDirect_HPCL_Q2FY15.pdf