The commissioning of the Guru Gobind Singh Refinery, operated by a 49:49 joint venture between Hindustan Petroleum Corpo-ration Ltd (HPCL) and Mittal Energy, on March 29 will help HPCL reduce its dependence on third-party refiners and improve its marketing-refining revenue mix. The Bhatinda-based refinery can process 180,000 barrels of crude oil a day (or about nine million tonnes per annum), and its commissioning significantly adds to HPCL’s current refining tally of 14.8 mtpa.
Though crude oil prices continue to remain firm, leading to higher subsidies for the sector on the whole, analysts feel a major share of subsidies will be borne by upstream oil companies like ONGC and downstream companies like HPCL will not be allowed to end up in the red. While the oil ministry has requested the finance ministry for an additional Rs 40,000 crore towards compensation of subsidies, a decision on fuel price rises that has been pending will give further boost to the profitability.
Against this backdrop, two-thirds of analysts, according to Bloomberg data, have ‘buy’ ratings on HPCL with a one-year consensus price target of Rs 354, indicating a 24 per cent upside from the current levels of Rs 285. The downside risks are prolonged indecision on fuel price rises and higher-than-expected subsidy share for downstream companies.
| FY13: GAINS FROM LOWER SUBSIDY, REFINING BIZ | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Net sales | 138,493 | 178,237 | 182,568 |
| % change y-o-y | 24.20 | 28.70 | 2.43 |
| Ebitda | 3,521 | 3,247 | 4,333 |
| Ebitda (%) | 2.50 | 1.80 | 2.40 |
| Net profit | 1,725 | 799 | 1,216 |
| % change y-o-y | 17.00 | -53.70 | 52.20 |
| EPS (Rs) | 50.30 | 26.60 | 37.00 |
| PE (x) | 5.60 | 10.70 | 7.70 |
| E: Estimates Source: Capitaline Plus, Bloomberg, Analyst reports | |||
Margin, volume gains
The commissioning of the Rs 19,000-crore Bhatinda (Punjab) refinery is positive for HPCL, as it’ll make the state-run company self-reliant in terms of sales volumes and boost its gross refining margins (GRMs). For instance, analysts say HPCL depended on third-party refiners to a considerable extent, 60 per cent in terms of volumes and 64 per cent in terms of value, in 2010-11. Apart from sourcing 80 per cent of the nine-mtpa output from the Bhatinda refinery, HPCL will be able to expand its marketing presence in north India, where it has limited presence.
In terms of GRMs, analysts at ICICI Securities observe the refinery’s high complexity would ensure a premium of at least $1-2 a barrel over the benchmark Singapore complex GRMs in the long term. They peg the value of the refinery at Rs 62 a share for HPCL. Analysts at Religare Securities, too, see the refinery having a high Nelson complexity of 11, comparable with Reliance’s Jamnagar refinery and, thus, fetching a premium of $2-4 a barrel over Singapore GRMs. The Nelson complexity index describes a measure of the secondary conversion capacity of a petroleum refinery relative, to the primary distillation capacity. The Reliance refinery at Jamnagar is a very complex one. They say with stand-alone profitability under pressure due to an ad hoc subsidy sharing mechanism, the refinery’s contribution will add to HPCL’s consolidated bottom line.
The refinery project is likely to improve the revenue marketing-refining mix for HPCL, currently at 1.2:1 (tilted towards marketing), and hence, exposes the company to price volatility. Thus, the lined-up expansion projects after the Bhatinda refinery will benefit HPCL further, though over a period of time. Reports suggest HPCL-Mittal Energy plans an initial public offering in 2012-13, which could rub off positively on HPCL’s stock.
More From This Section
In the long run, the company also plans to expand its Vizag refinery to 15 mtpa, from 8.3 mtpa, besides more new projects, including one at Ratnagiri and another 15-mtpa refinery and petrochemical project at Vizag.
Though the uncertainty over subsidy sharing continues and crude oil prices remain high, adding to the woes of the sector, the concern is more pronounced for upstream companies than downstream companies like HPCL. Oil marketing companies (OMCs) were losing Rs 13 a litre on diesel, Rs 28.7 a litre on kerosene and Rs 439 a cylinder on liquefied petroleum gas (as for the fortnight ended March 15). Though petrol is deregulated, OMCs have not been allowed to undertake any price rise in the recent past. Thus, even on petrol, the loss is more than Rs 6 a litre. However, expectations are that the government will take some decision on oil reforms soon. And, any positive development on this front is likely to boost the stock. Analysts at Avendus Capital, thus, forecast an 18 per cent annual drop in the 2012-13 under-recovery to Rs 112,800 crore, assuming increases of up to 10 per cent in diesel, kerosene and LPG retail prices.
Analysts at JM Financial observe while macro concerns on crude oil prices and reforms remain, near-term news flow on price rises and full compensation of 2011-12 estimated under-recoveries could help in re-rating of the stock, especially since HPCL continues to be most levered to any development in marketing business.
On the under-recovery side, Harshad Borawake and Deepak Dult at Motilal Oswal Securities observe that in the nine months to December 2011, the share of downstream companies in the subsidy burden was 16 per cent. For the full year, they expect upstream companies to share 40 per cent of the total under-recovery (about Rs 140,000 crore), while the rest would be compensated by the government. Under these assumptions, OMCs are set to register significant over-recoveries in the March quarter, with HPCL’s over-recovery at Rs 3,400 crore (net profit of Rs 4,447 crore). Hence, compared to a loss in the nine months to December, HPCL should end with a profit of Rs 727 crore for 2011-12, say Borawake and Dult.