RESULTS REVIEW 3QFY17 14 FEB 2017

Hindustan Petroleum Corporation

BUY
INDUSTRY OIL & GAS Strong foothold
HPCLs 3QFY17 EBITDA came in at Rs 28bn. Interest Highlights of the quarter
CMP (as on 13 Feb 2017) Rs 578
cost remains low (-68% YoY), owing to lower oil Reported GRM was US$ 6.4/bbl led by better product
Target Price Rs 650 under recovery. PAT was at Rs 15.9bn. Results are
margins and inventory gains. Total refinery throughput
Nifty 8,805
not comparable to the previous periods owing to the
was 4.7 mnT (+2% YoY,+15% QoQ).
impact of inventory, forex and oil under-recovery.
Sensex 28,352
The last two years has been a golden period for Petroleum product sale volumes were strong at 9.3
KEY STOCK DATA
OMCs. Fall in crude prices led to robust volume mnT (+7% YoY,+13% QoQ). Pipeline throughput was
Bloomberg HPCL IN growth, healthy marketing margins and healing of 4.5mnT (-2% YoY,+9% QoQ).
No. of Shares (mn) 1,016 the balance sheet. GRM trend was strong, contrary
MCap (Rs bn) / ($ mn) 587/8,766 to concerns about gloomy macros. A sharp recovery Net oil under-recovery was nil (vs. Rs 430mn YoY).
6m avg traded value (Rs mn) 1,981 in crude prices has also helped OMCs with a one-off Aggressive capex plans: HPCL will incur a capex of Rs
STOCK PERFORMANCE (%) inventory gains. We do not see a further rise in crude 558bn over the next five years in (1) Increasing refining
prices owing to the deal between OPEC and non- capacities, (2) Improving distillate yield, (3) making
52 Week high / low Rs 583/212
OPEC (excl. USA) countries to cut oil supplies. Higher auto fuels BS VI compliant, (4) developing marketing
3M 6M 12M output from US shale will cap the upside. OMCs story infrastructure, and (5) miscellaneous ventures (LNG,
Absolute (%) 28.5 36.3 138.7 is intact till crude prices are below $ 65/bbl. renewable, R&D). Capex will be back-ended and
Relative (%) 24.5 35.3 120.7 HPCL is favourably placed for a structural uptrend in funding will not be a worry owing to healthy cash flows
SHAREHOLDING PATTERN (%) the marketing segment. Sustainable profit (have and net D/E of 0.6x in FY16.
Promoters 51.11 doubled from FY15 to 17E) may lead to further re-
FIs & Local MFs 10.04 rating. We have raised our SOTP target to Rs 650 (5x Near-term outlook: GRM should remain strong owing
FY19E EV/e for standalone refining, 6.5x EV/e for to a severe winter and refinery outages in 1QFY18. We
FPIs 17.70
marketing and Rs 116/sh from other investments). see no concern for the stock till crude prices remain
Public & Others 21.15
Maintain BUY. below $ 65/bbl.
Source : BSE
Financial Summary (Standalone)
(Rs bn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) FY16 FY17E FY18E FY19E
Net Sales 485.56 430.07 12.9 421.03 15.3 1,795.7 1,819.1 2,113.9 2,203.1
Satish Mishra EBITDA 28.03 22.40 25.1 12.61 122.3 79.1 100.4 101.0 100.9
satish.mishra@hdfcsec.com PAT 15.90 10.41 52.7 7.01 126.8 38.7 55.5 54.8 52.8
+91-22-6171-7334 Diluted EPS (Rs) 15.7 10.2 52.7 6.9 126.8 38.1 54.6 54.0 52.0
P/E (x) 15.2 10.6 10.7 11.1
Deepak Kolhe EV / EBITDA (x) 8.5 6.4 6.4 6.6
deepak.kolhe@hdfcsec.com RoE (%) 22.5 28.8 25.8 22.5
+91-22-6171-7316 Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
 HPCL : RESULTS REVIEW 3QFY17

Benefits from declining gross under-recovery Benefits from marketing margins expansion
HPCLs gross UR will remain muted at ~Rs 90bn. Diesel marketing margins have increased by 10% in
FY16 (it was decontrolled in FY15). We expect ~5%
Government receivables will fall to ~Rs 20bn. increase per year going forward.

HPCL Gross UR Govt share in UR Blended Marketing Margin (Rs/t) Diesel Margins (Rs/l) RS
Govt Receivables Receivables/Govt share (%)
5,500 Rs /t Rs /l 2.0
400 Rs bn % 60
HPCLs gross UR will remain 5,000 1.8
muted 300 4,500
40 1.6
200 4,000
1.4
20 3,500
100 1.2
3,000
We expect ~5% increase in
marketing margins going - - 2,500 1.0
forward

FY11

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E
FY11

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Reducing debt and lowering interest cost Improvement in return ratios
Lower government receivables have led to a sharp Dividend yield is 4 to 5%.
reduction in total debt to ~Rs 130bn. We expect RoE/RoCE to remain strong, led by strong
Total interest cost remains low at ~Rs 5bn. profits.

Total Debt Interest Cost RHS RoE RoIC Dividend Yield

35 %
350 Rs bn Rs bn 25
We expect RoE/RoCE to 30
300
remain strong, led by 20 25
250
strong profits. 20
200 15
15
150 10 10
100 5
5
50 -
- -

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E
FY11

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 HPCL : RESULTS REVIEW 3QFY17

Quarterly Financials Snapshot (Standalone)

(Rs bn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
Net Sales 485.56 430.07 12.9 421.03 15.3
Raw Material 103.86 109.58 (5.2) 99.71 4.2
Trading 320.21 268.30 19.4 278.69 14.9
Sequential jump in EBITDA is Employee Expenses 6.10 6.91 (11.7) 6.05 0.9
led by better product spreads Other Expenses 27.34 22.88 19.5 23.96 14.1
and inventory gains EBITDA 28.03 22.40 25.1 12.61 122.3
Depreciation 6.34 6.96 (9.0) 6.16 2.9
EBIT 21.70 15.44 40.5 6.45 236.4
Interest cost remains low Other Income 2.88 2.03 41.6 5.47 (47.4)
Interest Cost 0.53 1.64 (67.7) 1.16 (54.5)
owing to lower subsidy
PBT 24.05 15.84 51.8 10.75 123.6
receivables
Tax 8.14 5.43 50.1 3.74 117.7
RPAT 15.90 10.41 52.7 7.01 126.8
EO (Loss) / Profit (Net Of Tax) - - -
EPS 15.7 10.2 52.7 6.9 126.8
Margin Analysis
3QFY17 3QFY16 YoY (bps) 2QFY17 QoQ (bps)
Raw Material As % Of Net Sales 21.4 25.5 (409) 23.7 (229)
Trading As % Of Net Sales 65.9 62.4 356 66.2 (25)
Employee Expenses as % of Net Sales 1.3 1.6 (35) 1.4 (18)
Other Operating Expenses As % of Net Sales 5.6 5.3 31 5.7 (6)
EBITDA Margin (%) 5.8 5.2 56 3.0 278
Net Profit Margin (%) 3.3 2.4 85 1.7 161
Tax Rate (%) 33.9 34.3 (39) 34.8 (92)
Key Quarterly Data
3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
Refinery Throughput (mmt) 4.7 4.6 2.0 4.0 15.3
Pipeline Throughput (mmt) 4.5 4.5 (1.5) 4.1 8.5
GRM was aided by inventory Sales Volumes (mmt) 9.3 8.7 7.3 8.2 13.4
gains GRM (USD/bbl) 6.4 7.9 (18.8) 3.2 97.5
Gross Under/(Over) Recovery (Rs bn) - 4.8 (100.0) 3.6 (100.0)
Net under recovery was nil Net Under/(Over) Recovery (Rs bn) - 0.4 (100.0) - -
Source: Company, HDFC sec Inst Research

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 HPCL : RESULTS REVIEW 3QFY17

Assumptions
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Refining Business
We expect GRM to remain Throughput (mnT) 16.2 15.8 15.5 16.2 17.2 17.6 17.6 17.6
flat in FY18/19 GRM (US$/bbl) 2.9 2.1 3.4 2.8 6.7 5.5 5.5 5.5
Marketing Business
Total Sales (mnT) 29.5 30.3 31.0 32.0 34.2 35.7 37.2 38.8
YoY Gr (%) 9.1 2.8 2.1 3.3 7.0 4.5 4.1 4.2
We expect diesels marketing Diesel Volume (mn T) 14.2 15.5 16.0 15.8 16.9 17.4 17.8 18.2
margins to increase by 5% Diesel Volume Gr (%) 15.3 8.7 3.3 (0.9) 6.5 3.0 2.5 2.5
Petrol Volume Gr (%) 7.5 5.2 8.6 13.1 12.3 10.0 7.0 7.0
Diesel Margin (Rs/l) 1.4 1.4 1.4 1.4 1.5 1.6 1.7 1.8
Macro
Lower gross UR will lead to INR-US$ 47.9 54.5 60.5 61.2 65.5 66.0 67.0 67.0
no net UR and lower debt Crude Price (US$/bbl) 114.5 110.0 107.8 90.5 47.6 50.0 55.0 55.0
Total Sector UR (Rs bn) 1,385 1,610 1,399 723 276 330 433 426
HPCL Gross UR (Rs bn) 304 362 325 164 60 72 94 92
HPCL Net UR (Rs bn) 0.1 2.1 4.8 5.5 0.1 - - -
Source: Company, HDFC sec Inst Research

Change In Estimates
Change in estimates (Rs bn) FY18 Old FY18 New YoY (%) FY19 Old FY19 New YoY (%)
factoring higher crude price, Revenue 1,876.5 2,113.9 12.7 1,950.3 2,203.1 13.0
strong marketing volumes, EBITDA 83.38 101.03 21.2 85.05 100.87 18.6
and higher GRMs PAT 40.84 54.85 34.3 41.18 52.79 28.2
EPS (Rs/sh) 40.2 54.0 34.3 40.5 52.0 28.2
Source: HDFC sec Inst Research

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 HPCL : RESULTS REVIEW 3QFY17

Valuation (Based on FY19E)

Business EBITDA Value Value
Multiple Valuation basis
(Rs bn) (Rs bn) (Rs/sh)
Standalone
Refining 27.29 5.0 136 134 EV/EBIDTA on FY19E
Marketing 71.02 6.5 462 454 EV/EBIDTA on FY19E
Pipeline 2.56 9.0 23 23 EV/EBIDTA on FY19E
Standalone net Debt (78) (77) As on Mar-18E
Standalone Equity Value 543 534
Investments
Traded investments 0.8 31 24 20% discount to CMP
HPCL Mittal Energy Ltd (HMEL) 46.6 6.5 303 146 EV/EBIDTA on FY19E
HMEL net debt (140) (67) As on Mar-18E
HMEL Equity Value 163 79 HPCL's stake is 48.9%
Other non traded investments 1.0 13 13 1x BV
Investments Equity Value 116
Value per share 650
Source: Company, HDFC sec Inst Research

Peer Valuations
Mcap CMP TP EPS (Rs/sh) P/E (x) P/BV (x) ROE (%)
Reco.
(Rs bn) (Rs/sh) (Rs/sh ) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
Reliance Industries 3,337 1,030 BUY 1,225 91.2 103.2 117.7 11.3 10.0 8.8 1.3 1.1 1.0 11.7 12.0 12.3
ONGC 2,467 192 NEU 220 14.2 15.3 16.8 13.5 12.6 11.5 1.5 1.5 1.4 11.7 12.0 12.4
Indian Oil Corp 1,845 380 BUY 425 39.5 41.1 40.3 9.6 9.2 9.4 2.2 1.9 1.7 24.4 22.3 19.3
BPCL 1,033 715 NEU 730 52.1 54.1 60.7 13.7 13.2 11.8 3.4 3.0 2.6 26.1 24.1 23.8
Gail India 611 482 BUY 535 29.5 33.7 36.4 16.3 14.3 13.2 1.9 1.7 1.6 11.8 12.5 12.5
HPCL 587 578 BUY 650 54.6 54.0 52.0 10.6 10.7 11.1 2.9 2.6 2.4 28.8 25.8 22.5
Petronet LNG 286 382 BUY 435 20.8 25.3 30.3 18.3 15.1 12.6 3.8 3.3 2.8 22.6 23.3 23.6
OIL India 268 335 NEU 360 26.0 25.8 25.8 12.9 12.9 13.0 0.9 0.8 0.8 9.2 8.8 8.5
Indraprastha Gas 142 1,013 BUY 1,200 40.9 45.0 50.7 24.8 22.5 20.0 5.0 4.3 3.7 21.7 20.4 19.7
Source : Company, HDFC sec Inst Research,

Page | 5
 HPCL : RESULTS REVIEW 3QFY17

Standalone Income Statement Standalone Balance Sheet

(Rs bn) FY15 FY16 FY17E FY18E FY19E (Rs bn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 2,063.80 1,792.81 1,816.12 2,110.87 2,200.05 SOURCES OF FUNDS
Growth (%) (7.5) (13.1) 1.3 16.2 4.2 Share Capital 3.39 3.39 10.17 10.17 10.17
Material Expenses 1,891.86 1,566.50 1,582.45 1,867.64 1,947.39 Reserves 156.83 180.17 190.82 213.58 235.47
Employee Expenses 24.15 23.15 24.42 26.86 29.55 Total Shareholders Funds 160.22 183.56 200.99 223.75 245.64
Other Operating Expenses 98.96 127.02 111.78 118.36 125.33 Long Term Debt 148.56 106.33 93.83 95.33 110.83
Operating Profits 48.83 76.15 97.47 98.01 97.79 Short Term Debt 54.80 45.70 33.20 33.20 33.20
Operating Profit Margin (%) 2.4 4.2 5.4 4.6 4.4 Total Debt 203.35 152.03 127.03 128.53 144.03
Other Operating Income 2.46 2.90 2.96 3.02 3.08 Deferred Taxes 41.04 48.10 48.10 48.10 48.10
EBITDA 51.29 79.05 100.43 101.03 100.87 Long Term Provisions & Others 88.68 98.82 112.09 127.23 144.50
EBITDA Margin (%) 2.5 4.4 5.5 4.8 4.6 TOTAL SOURCES OF FUNDS 493.29 482.52 488.23 527.62 582.28
EBITDA Growth (%) (1.9) 54.1 27.0 0.6 (0.2) APPLICATION OF FUNDS
Depreciation 19.79 26.59 24.70 25.53 27.06 Net Block 290.63 334.46 315.76 321.22 331.16
EBIT 31.50 52.46 75.73 75.49 73.81 CWIP 34.74 18.77 58.77 78.77 118.77
Other Income (Incl EO LT Investments 58.68 60.00 60.00 60.00 60.00
17.11 11.33 12.43 11.28 10.24
Items) LT Loans & Advances 14.30 15.73 15.73 15.73 15.73
Interest 7.07 6.40 5.38 4.90 5.25 Other non current assets 1.17 0.86 0.86 0.86 0.86
PBT 41.54 57.38 82.78 81.86 78.79 Total Non-current Assets 399.51 429.82 451.12 476.59 526.52
Tax 14.21 18.75 27.32 27.01 26.00 Inventories 129.72 127.09 119.61 139.00 144.86
RPAT 27.33 38.63 55.46 54.85 52.79 Debtors 36.03 41.93 39.87 46.33 48.29
EO (Loss) / Profit (Net Of Cash & Equivalents 53.96 50.14 50.48 50.28 50.72
0.03 (0.04) - - -
Tax)
Other Current Assets 56.28 55.73 55.73 55.73 55.73
APAT 27.30 38.67 55.46 54.85 52.79
Total Current Assets 275.99 274.89 265.69 291.33 299.59
Growth (%) 53.8 41.6 43.4 (1.1) (3.8)
Creditors 89.36 65.87 72.26 83.98 87.52
AEPS 26.9 38.1 54.6 54.0 52.0
Other Current Liabilities 92.86 156.32 156.32 156.32 156.32
Growth (%) 53.8 41.6 43.4 (1.1) (3.8)
Total Current Liabilities 182.22 222.19 228.58 240.30 243.84
Source: Company, HDFC sec Inst Research
Net Current Assets 93.78 52.70 37.10 51.03 55.75
TOTAL APPLICATION OF FUNDS 493.29 482.52 488.23 527.62 582.28
Source: Company, HDFC sec Inst Research

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 HPCL : RESULTS REVIEW 3QFY17

Standalone Cash Flow Standalone Key Ratios

(Rs bn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
Reported PBT 41.54 57.38 82.78 81.86 78.79 PROFITABILITY %
Non-operating & EO items (6.77) 1.53 (12.43) (11.28) (10.24) EBITDA Margin 2.5 4.4 5.5 4.8 4.6
Depreciation 19.71 26.67 24.70 25.53 27.06 EBIT Margin 1.5 2.9 4.2 3.6 3.4
APAT Margin 1.3 2.2 3.0 2.6 2.4
Interest expenses 7.07 6.40 5.38 4.90 5.25
RoE 17.6 22.5 28.8 25.8 22.5
Working Capital Change 124.49 (14.58) 29.21 1.00 12.99 Core RoCE 5.2 10.3 14.4 13.5 11.7
Tax Paid (7.62) (12.14) (27.32) (27.01) (26.00) RoCE 6.1 9.2 12.3 11.6 10.3
OPERATING CASH FLOW ( a ) 178.41 65.27 102.32 75.02 87.85 EFFICIENCY
Capex (40.66) (46.89) (46.00) (51.00) (77.00) Tax Rate % 34.2 32.7 33.0 33.0 33.0
Free cash flow (FCF) 137.75 18.38 56.32 24.02 10.85 Fixed Asset Turnover (x) 4.6 3.5 3.3 3.7 3.7
Investments (1.32) (1.33) - - - Inventory (days) 23 26 24 24 24
Other Income 17.06 11.38 12.43 11.28 10.24 Debtor (days) 6 9 8 8 8
Others (7.99) (6.82) - - - Other Current Assets (days) 10 11 11 10 9
Payables (days) 16 13 15 15 15
INVESTING CASH FLOW ( b ) (32.91) (43.65) (33.57) (39.72) (66.76)
Other Current Liab & Provns (days) 16 32 31 27 26
Debt Issuance (131.90) (0.34) (25.00) 1.50 15.50 Cash Conversion Cycle (days) 7 1 (3) 0 1
Interest expenses (7.07) (6.40) (5.38) (4.90) (5.25) Net Debt/EBITDA (x) 2.8 1.0 0.6 0.6 0.8
FCFE (1.22) 11.64 25.94 20.61 21.11 Net D/E 0.9 0.4 0.3 0.3 0.3
Share capital Issuance - - - - - Interest Coverage 4.5 8.2 14.1 15.4 14.1
Dividend (6.14) (17.49) (38.03) (32.09) (30.90) PER SHARE DATA
Others (0.58) (0.21) - - - EPS (Rs) 26.9 38.1 54.6 54.0 52.0
FINANCING CASH FLOW ( c ) (145.68) (24.45) (68.41) (35.49) (20.65) CEPS (Rs) 139.1 192.7 78.9 79.1 78.6
NET CASH FLOW (a+b+c) (0.18) (2.83) 0.34 (0.20) 0.44 DPS (Rs) 24.5 34.5 32.0 27.0 26.0
BV (Rs) 473.1 542.1 197.9 220.3 241.8
EO Items 2.56 (0.99) - - -
VALUATION
Closing Cash & Equivalents 53.96 50.14 50.48 50.28 50.72 P/E (x) 21.5 15.2 10.6 10.7 11.1
Source: Company, HDFC sec Inst Research P/Cash EPS (x) 4.2 3.0 7.3 7.3 7.4
P/BV (x) 1.2 1.1 2.9 2.6 2.4
EV/EBITDA (x) 14.2 8.5 6.4 6.4 6.6
EV/Revenue (x) 0.4 0.4 0.4 0.3 0.3
OCF/EV (%) 24.5 9.8 15.8 11.5 13.1
FCFF/EV (%) 18.9 2.7 8.7 3.7 1.6
FCFE/M CAP (%) (0.2) 2.0 4.4 3.5 3.6
Dividend Yield (%) 4.2 6.0 5.5 4.7 4.5
Source: Company, HDFC sec Inst Research

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 HPCL : RESULTS REVIEW 3QFY17

RECOMMENDATION HISTORY
Date CMP Reco Target
HPCL TP 13-Feb-16 230 BUY 283
700
8-Mar-16 249 BUY 283
650
30-May-16 311 BUY 367
600
11-Jul-16 343 BUY 367
550
22-Jul-16 387 BUY 450
500
450 23-Aug-16 384 BUY 450
400 7-Oct-16 444 BUY 475
350 16-Nov-16 444 BUY 515
300 14-Feb-17 578 BUY 650
250
200
Rating Definitions
Apr-16
Feb-16

Sep-16

Feb-17
Jun-16

Jul-16
Mar-16

Dec-16
Oct-16
Aug-16

Nov-16

Jan-17
May-16

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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 HPCL : RESULTS REVIEW 3QFY17

Disclosure:
We, Satish Mishra, PGDM,& Deepak Kolhe, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our
views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in
this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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Board : +91-22-6171 7330www.hdfcsec.com

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