Oil - Downstream Achchhe din :: HDFC Securities

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Oil - Downstream
Achchhe din*
OMC stocks have fallen by 0-7% over the last month.
Falling crude prices, initially considered fortuitous,
are now adversely affecting global sentiment. We
anticipate huge inventory losses in 3QFY15 for Indian
OMCs and recognise near term concerns. The big
picture has, however, improved structurally.
FY15 witnessed a series of positive developments. A
stable/growth oriented govt., free fall in crude prices
& diesel decontrol have totally changed the terrain.
Oil under-recovery (the genesis of all problems for
OMCs) is likely to fall from Rs 1.4tn in FY14 to Rs
0.4tn in FY16/17 (assuming crude at $ 80/bbl and
INR-USD at 63). As a result, OMCs’ total debt/interest
will reduce from Rs 1,325/78 bn to Rs 766/45 bn.
An imminent expansion in diesel marketing margin is
another trigger for OMCs. It was capped at Rs 1.4/L
(vs. Rs 2+/L for petrol) for over five years. Marketing
segment contributes 40-80% of EBITDA for OMCs and
diesel is ~50% of volumes. Private players are set to
re-enter auto-fuels retailing but we do not foresee a
large impact. Our base case assumes diesel
marketing margin expansion of 0/10/10% in
FY15/16/17 and petrol + diesel volume growth of
only ~2% for the OMCs vs. 5.4% for the sector.
 Weakness in refining is not disastrous : Fall in crude
prices will eventually lead to pressure on GRMs.
However, for all the three OMCs, refining does not
contribute more than 30% to EBITDA (BPCL 29%, HPCL
9%, IOC 29% in FY17). Impact of inventory losses will be
over in FY15.
 OMCs set to benefit
BPCL : Perfectly placed to capture the upsides from
both E&P and marketing. Upgrade to BUY and raise TP
to Rs 790/sh (4.9x FY17E EV/EBITDA for standalone biz,
Rs 103/111 per share from E&P/other investments).
HPCL : Highest marketing to refining ratio (2x) makes it
the best proxy to ride higher marketing margins.
Initiate with a BUY and a TP of Rs 740/sh (5.1x FY17E
EV/EBITDA for standalone biz and Rs 149/sh from inv.).
IOC : Most diversified and steady biz model. Earnings
from marketing and the Paradeep refinery are key
triggers. Initiate with a BUY and a TP of Rs 425/sh (5.1x
FY17E EV/e for stand. and Rs 120/sh from investment).
 Risks : (1) Sharp volatility in crudes price/exchange rate
(2) Higher UR sharing by the OMCs (3) Aggression from
private players to capture the retail market share (4)
Under-performance in the near term (3QFY15 results).


LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010603