BSE SENSEX S&P CNX CMP: INR1,215 TP: INR1,490(+23%) Buybsmedia.business-standard.com/_media/bs/data/market... · 2016-08-23 · government will stay put with its deregulation decision

22 August 2016 1QFY16 Results Update | Sector: Oil & Gas

HPCL BSE SENSEX S&P CNX CMP: INR1,215 TP: INR1,490(+23%) Buy 27,986 7,629 Bloomberg HPCL IN Equity Shares (m) 339.0 M.Cap.(INR b)/(USD b) 411.8 / 6.1

52-Week Range (INR) 1329 / 636 1, 6, 12 Rel. Per (%) 3/69/39 12M Avg Val (INR M) 1196 Free float (%) 48.9

Financials & Valuations (INR b)

Y/E Mar 2016 2017E 2018E Net Sales 1,793 1,833 1,914 EBITDA 76.2 88.8 93.9 PAT 38.6 45.2 48.1 EPS (INR) 113.9 133.4 142.0 Gr. (%) 41.3 17.1 6.4 BV/Sh (INR) 546 633 725 RoE (%) 22.4 22.6 20.9 RoCE (%) 11.4 12.0 11.4 P/E (x) 10.7 9.1 8.6 P/BV (x) 2.2 1.9 1.7

Estimate change TP change Rating change

EBITDA/PAT beat driven by higher inventory gains; Valuations attractive HPCL’s reported 1QFY17 EBITDA of INR35.6b (est. INR29.5b, +20 YoY, +38% QoQ) led by (a) GRM at USD6.8/bbl (inv. Gain of ~USD2/bbl) and (b) product inventory gains of INR11b (est INR8b). PAT was further helped by lower depreciation at INR6.1b (-19% YoY, -10% QoQ) and stood at INR21b (est. of INR16.5b; +32% YoY, +35% QoQ). While the GRM have softened recently, we note that the auto fuel marketing margins are inching higher (up INR0.5/ltr in the last two fortnights) and should partly compensate for lower GRM in the near term. Valuations undemanding with dividend yield of ~3.5%. Maintain Buy. Above estimates: HPCL reported 1QFY17 EBITDA of INR35.6b, (+20 YoY, +38%

QoQ) led by GRM of USD6.8/bbl (est USD6.1/bbl; -20% YoY, -9% QoQ) helped by inventory gain of ~USD2.3/bbl. Forex loss stood at INR747m (v/s INR530m in 1QFY16 and INR490m in 4QFY16).

Nil subsidy shares in 1QFY17: As expected, subsidy sharing was nil in 1QFY17 and we model OMCs’ subsidy sharing at nil in FY17/FY18.

Marketing volumes up 4% YoY: While, the marketing sales were up 4% YoY to 8.92mmt, refinery throughput was at 4.48mmt (+19% YoY, -5% QoQ). HPCL’s debt as of 1QFY17 stands at INR177b (vs INR145b on March 31, 2016)

IndAS impact is minimal on the income statement, except for revenues which will now be on gross basis (i.e. before excise duties).

Valuation and view: While refining margins would continue to be cyclical, marketing profitability will be stable led by retail pricing power. We believe HPCL is now a structural investment play - led by higher earnings predictability and increase in profitability leading to higher RoEs.

We value HPCL (on FY18E) at 5x for refining and 7.5x for marketing to arrive at a fair value of INR1,490 implying a 23% upside. HPCL trades at 8.6x FY18E standalone EPS and 7x FY18E consolidated EPS of INR175. Maintain Buy.

Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Harshad Borawake ([email protected]); +91 22 3982 5432

HPCL

22 August 2016 2

Exhibit 1: HPCL Quarterly and Half-yearly earnings snapshot (INRm)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 YoY (%) QoQ (%) Key Operating Metrics

Brent (USD/bbl) 61.9 50.2 45.0 33.2 46.0 -26% 38% Fx rate (INR/USD) 63.7 65.0 66.0 67.3 67.0 5% 0% Marketing volume (mmt) 8.6 7.9 8.7 9.1 8.9 4% -1% GRM (USD/bbl) 8.6 2.7 7.9 7.5 6.8 -20% -9% Reuters Singapore GRM (USD/bbl) 8.0 6.3 8.0 7.7 5.0 -38% -35% Refinery thr' put (mmt) 3.8 4.2 4.6 4.7 4.5 19% -5%

Financial Summary (INRm) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 YoY (%) QoQ (%) Net Sales 517,204 420,036 434,311 421,260 447,793 -13% 6% Adj. EBITDA 24,499 14,159 26,842 25,751 25,401 4% -1%

Refining 11,901 1,896 13,471 13,311 11,127 -7% -16% Marketing & others 12,598 12,263 13,370 12,439 14,273 13% 15%

EBITDA Margin (%) 4.7% 3.4% 6.2% 6.1% 5.7% Adventitious gain/(loss) 5,830 (14,040) (4,220) 290 11,000 89% 3693% Net subsidy gain/(loss) 3 (24) (430) 370 0 -100% -100% Forex gain/(loss) (530) (1,360) (480) (490) (747) 41% 53% Reported EBITDA 29,802 (1,265) 21,711 25,921 35,653 20% 38% EBITDA Margin (%) 5.8% -0.3% 5.0% 6.2% 8.0% Depreciation (7,508) (5,428) (6,978) (6,754) (6,108) -19% -10% EBIT 22,294 (6,693) 14,733 19,167 29,545 33% 54%

Interest (1,227) (1,650) (1,610) (1,913) (1,395) 14% -27% Other Income 3,138 3,640 2,732 4,771 3,368 7% -29% PBT b/f exceptional 24,204 (4,703) 15,855 22,025 31,518 30% 43%

Exceptional PBT 24,204 (4,703) 15,855 22,025 31,518 30% 43%

Income Tax (8,324) 1,499 (5,433) (6,495) (10,534) 27% 62% Tax rate (%) 34.4% 31.9% 34.3% 29.5% 33.4% PAT 15,880 (3,205) 10,423 15,529 20,984 32% 35% PAT margin (%) 3.1% -0.8% 2.4% 3.7% 4.7% EPS 46.8 (9.5) 30.7 45.8 61.9 32% 35%

Source: Company, MOSL

Exhibit 2: Ad-hoc subsidy sharing resulting in volatile quarterly profits (INRb)


(92)

23

1

77

(15)

3

(17)

46

0 9

(3)

22

16

(3)

10

16

21

(73)

17

2

52

(5) (2)

(32)

34

(5) (0)

0

0

0

(0)

(0)

0

0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

PAT Net (under)/over recovery

HPCL

22 August 2016 3

Exhibit 3: HPCL Marketing volume trend – up 4% YoY and down 1.4% QoQ (mmt)


Exhibit 4: HPCL GRM trend – 1QFY17 GRM at USD6.8/bbl (USD/bbl) buusted in crude inventory gain of ~USD2/bbl


Exhibit 5: HPCL refinery-wise throughput trend; up 19% YoY, -5% QoQ (mmt)


7.7 7.2 7.7 7.8 7.9 7.2

7.8 8.0 8.3 7.4

8.1 8.2 8.6 7.9

8.7 9.1 8.9

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

FY13 FY14 FY15 FY16 FY17

(2.1)

4.4

1.9

3.7

2.6 3.8 2.4 4.7

2.0 2.1

(1.0)

7.5

8.6

2.7

7.9 7.5

6.8

6.7 9.1

6.3

8.7 6.6

5.4 4.3

6.2 5.8 4.8

6.3

8.6

8.0 6.3

8.0 7.7 5.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

HPCL GRM Singapore GRM(In USD/bbl)

1.6 2.1 2.0 2.0 1.7 2.0 2.0 2.0 1.4 2.0 1.9 2.0 1.6 2.1 2.1 2.2 2.1

2.0 1.5 2.2 2.4 1.7

1.9 1.9 2.3

1.9

2.5 2.0 2.4 2.1

2.1 2.5 2.5 2.4

3.6 3.7 4.2 4.4

3.4 3.9 3.8

4.4

3.3

4.5 4.0

4.5 3.8

4.2 4.6 4.7 4.5



Mumbai Visakh TotalRefinery thr'put (mmt)

HPCL

22 August 2016 4

Exhibit 6: HPCL under recovery quarterly trend (INRb)


Exhibit 7: Industry level gross under recoveries have come down sharply; LPG shifted to DBTL (INRb)

Source: PPAC, Industry, MoPNG

Exhibit 8: Government has increased auto fuel excise duty sharply in last few quarters

*Ad-valorem duty in nil since Jan-08 Source: PPAC, MoPNG, MOSL

107 83 87 85

58.3 82.3 92.2 91.8

66.2 51.6

35.8 10.5 6.7 5.5 4.8 2.5 3.3

-60-30

0306090

120150



Upstream Sharing Oil Bonds/Cash Net Under/(over) recovery Gross Under recovery

- - - - - - - - - - - - - - - - - - - - -

299

92 187 241 290 236 207 182

105 186 185 152 90 26 (7) - - - - - -

66

60

73 78

73 71 77 75

64 75 85 82

75 73 64 36 39 32 29 16 24

70

63

65 87

115 70 110 105

85

93 127 159 121

125 103

17 49 40 33 40 28

436

215

325 406

478

378 393 362

254

354 398 393

287 224

159

53 87 72 61 55 52

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

FY12 FY13 FY14 FY15 FY16 FY17

Petrol Diesel PDS Kerosene Domestic LPG TotalGross under recoveries HPCL + BPCL + IOCL (INRb)

13.8 13.8 14.8 14.8

9.5 9.5 11.0 13.3

15.4 17.5 17.5 19.1 19.4 20.5 21.5 21.5 21.5 21.5 21.5 21.5

3.7 3.7 4.7 2.1

3.6 3.6 5.1 6.1 8.2

10.3 10.3 10.7 11.8 15.8 17.3 17.3 17.3 17.3 17.3 17.3

May

-08

Mar

-10

Mar

-11

Mar

-12

Sep-

12

Mar

-14

Nov

-14

Dec-

14

Jan-

15

Jan-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Apr-

16

May

-16

Jun-

16

Jul-1

6

Petrol Excise (INR/ltr) Diesel Excise (INR/ltr)

HPCL

22 August 2016 5

Exhibit 9: Auto Fuel Retail Price trend in India – Despite excise duty hikes, auto fuel prices still below their peak levels

Source: PPAC, MoPNG, MOSL

Valuation and view Widening Moat: OMCs’ economic moat is widening, led by (1) scope for

meaningful increase in marketing margins and profitability, (2) slower ramp-up by private marketers, (3) high volume growth, aided by expected GDP boost, and (4) improving balance sheet with increasing cash flow.

OMCs profit normalization was delayed for a decade: OMC’s deregulation and in turn their profit normalization had been derailed for a decade after an earlier brief de-regulation period in 2004-06. However, this time around we believe government will stay put with its deregulation decision given the hard lessons of financial stress of last decade. Increased excise duties offer some flexibility to moderate prices in event of spike in oil prices, but huge and growing India consumption volumes will make it practically impossible to again revisit the price control model.

Marketing division to drive profitability: Post de-regulation, we expect marketing division profitability to grow rapidly, hence should also command a higher valuation. An INR0.5/ltr increase in petrol and diesel marketing margins increases HPCL’s FY18E EPS by 22%. We model gross per liter diesel margin of INR1.6/230 in FY17/FY18.

Pure play marketing companies trade at higher valuations: Pure play petroleum marketing companies - US based CST Brands (CST US; M Cap: USD3.6b) and New Zealand based Z Energy (ZEL NZ; M Cap: USD2b) trade at >10x EV/EBITDA. These valuations (in-line with the underlying business dynamics) are more similar to consumer business than refining or oil & gas.

We value HPCL (on FY18E) at 5x for refining and 7.5x for marketing to arrive at a fair value of INR1,490 implying a 23% upside. HPCL trades at 8.6x FY18E standalone EPS and 7x FY18E consolidated EPS of INR175. Maintain Buy.

0

25

50

75

100

125

0

20

40

60

80

100

Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16

Brent (USD/bbl) - RHS Gasoline price (INR/ltr) Diesel price (INR/ltr)

Petrol de-

regulated

Diesel monthly price hikes begin

Diesel de-regulated

HPCL

22 August 2016 6

Exhibit 10: HPCL – Key Assumptions FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Exchange Rate (INR/USD) 45.8 47.5 45.7 47.9 54.5 60.6 61.1 65.5 68.0 70.0 Brent Crude (USD/bbl) 84.8 69.6 86.5 114.5 110.6 107.8 86.0 47.6 50.0 55.0 Market Sales (MMT) 25.4 26.3 27.0 29.5 30.3 31.0 32.0 34.2 36.1 38.1

YoY (%) 3.8% 3.5% 2.9% 9.1% 2.8% 2.1% 3.2% 7.1% 5.5% 5.5% GRM (USD/bbl)

HPCL Blended GRM 5.17 2.97 4.47 5.20 2.08 3.43 2.84 6.67 5.25 6.00 Reuters Singapore GRM 5.75 3.55 5.18 8.17 7.70 5.62 6.36 7.49 5.50 6.50 Prem/(disc) (0.58) (0.58) (0.70) (2.96) (5.62) (2.19) (3.52) (0.82) (0.25) (0.50)

Refining capacity utilization (%) 118% 116% 106% 99% 98% 95% 101% 106% 110% 110% Total Refinery throughput (MMT) 16.5 16.3 15.8 16.1 15.8 15.4 16.4 17.2 17.9 17.9

YoY (%) -1.5% -1.5% -3.1% 1.9% -1.4% -2.6% 6.3% 5.1% 3.8% 0.0% Pipeline throughput (mmt) 10.6 12.0 13.0 13.6 13.8 15.7 14.9 14.9 14.9 14.9 Net subsidy sharing (0.0) 12.3 15.1 0.1 2.3 4.8 5.0 0.1 - - Net sharing (%) 0% 12% 9% 0% 1% 1% 3% 0% 0% 0%


HPCL

22 August 2016 7

Story in charts

Exhibit 11: HPCL’s GRMs have underperformed Singapore GRM (USD/bbl)


Exhibit 12: While refining capacity has been largely flat, marketing sales have shown steady increase


Exhibit 13: Expect EBITDA to be driven up higher marketing margins


Exhibit 14: Expect D/E ratio to decline with increasing profitability (x)


Exhibit 15: Diesel deregulation to reduce working capital leading to lower interest costs


Exhibit 16: HPCL: 1 Year Forward P/E Chart


(0.6) (0.7) (3.0)

(5.6) (2.2) (3.5)

(0.8) (0.3) (0.5) 3.0

4.5 5.2

2.1 3.4 2.8

6.7 5.3 6.0

3.6 5.2

8.2 7.7 5.6 6.4 7.5

5.5 6.5

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Prem/(Disc) to Singapore HPCL Blended GRMSingapore GRM

26 27 29 30 31 32

34 36

38

17 16 16 16 16 15 16 17 18


Marketing Sales (mmt) Refinery Throughput (mmt)

25 33 34 39

52 54

76 89 94

13 15 9

9 17 27

39 45 48


EBITDA (INRb) PAT (INRb)

1.8 2.0

2.3 2.4 2.1

1.1 0.8 0.8 0.7

FY10 FY12 FY14 FY16 FY18E

D/E Ratio

213 250 298 325 319 171 145 177 177

9 9

17 18

15

7 6 6 7


Total Debt (INRb) Interest Cost (INRb)

9.2

24.6

9.1

2.6 2

7

12

17

22

27

Aug-

06

Nov

-07

Feb-

09

May

-10

Aug-

11

Nov

-12

Feb-

14

May

-15

Aug-

16PE (x) Peak(x) Avg(x) Min(x)

HPCL

22 August 2016 8

Financials and Valuations

Income Statement

(INR Million) Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E Net Sales 1,309,342 1,781,392 2,065,293 2,231,454 2,063,804 1,792,811 1,832,519 1,914,292 Finished Goods 843,135 1,093,707 1,281,786 1,451,380 1,292,784 1,159,484 1,222,719 1,221,824 Raw Materials Cons 366,443 561,189 639,921 613,881 599,079 407,012 438,524 526,373 Employee cost 20,172 15,831 25,256 20,303 24,147 23,145 26,617 32,739 Other Exp 46,505 76,583 78,907 93,809 93,618 127,001 55,832 39,506 EBITDA 33,088 34,082 39,424 52,081 54,176 76,168 88,828 93,850

% of Net Sales 2.5 1.9 1.9 2.3 2.6 4.2 4.8 4.9 Depreciation 14,070 17,129 19,315 21,884 19,712 26,668 28,346 30,894 Interest 8,840 16,977 18,377 15,046 7,066 6,401 6,316 6,738 Other Income 13,435 12,222 12,300 11,004 14,142 14,282 13,764 15,614 Extraordinary Items (net) -152 -5 714 0 0 0 0 PBT 23,461 12,192 14,746 26,155 41,541 57,381 67,930 71,831 Tax 8,071 3,077 5,699 8,817 14,209 18,753 22,694 23,704

Total Rate (%) 34.4 25.2 38.6 33.7 34.2 32.7 33.4 33.0 PAT 15,390 9,115 9,047 17,338 27,333 38,627 45,235 48,127 Adjusted PAT 15,390 9,115 9,047 17,338 27,333 38,627 45,235 48,127

% of Net Sales 1.2 0.5 0.4 0.8 1.3 2.2 2.5 2.5 Change (%) 18.3 -40.8 -0.7 91.6 57.6 41.3 17.1 6.4

Balance Sheet

(INR Million) Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E Share Capital 3,390 3,390 3,390 3,390 3,390 3,390 3,390 3,390 Reserves 122,068 127,835 133,874 146,732 156,831 181,775 211,145 242,376 Net Worth 125,458 131,225 137,264 150,122 160,221 185,165 214,535 245,766 Loans 250,212 298,312 324,583 319,301 170,556 145,220 177,320 177,320 Deferred Tax 31,956 30,853 35,984 39,084 41,036 48,105 51,745 58,929 Capital Employed 407,626 460,390 497,830 508,506 371,813 378,490 443,601 482,015

Gross Fixed Assets 296,484 334,590 370,062 424,668 481,749 541,493 615,493 645,493 Less: Depreciation 110,039 126,094 144,575 165,545 191,121 217,789 246,135 277,029 Net Fixed Assets 186,445 208,496 225,487 259,122 290,628 323,705 369,358 368,464 Capital WIP 37,987 44,445 51,729 45,856 34,744 30,000 8,000 58,000 Investments 113,350 103,705 106,269 108,598 112,415 109,947 115,694 115,694 Curr. Assets, L & Adv. 265,910 354,427 378,962 362,204 237,719 241,865 286,035 283,076 Inventory 166,223 194,545 164,387 187,754 129,723 127,091 136,524 140,354 Debtors 26,544 35,652 49,350 54,660 36,031 42,296 43,232 45,162 Cash & Bank Balance 800 2,264 1,471 347 171 1,483 42,584 33,865 Loans & Advances 71,358 116,484 160,008 114,693 67,364 67,364 60,064 60,064 Other Current Assets 985 5,483 3,745 4,750 4,432 3,632 3,632 3,632 Current Liab. & Prov. 196,066 250,683 264,617 267,275 303,693 327,027 335,487 343,220 Liabilities 178,018 230,847 241,622 243,978 273,903 305,459 311,763 317,123 Provisions 18,048 19,836 22,995 23,296 29,790 21,568 23,725 26,097 Net Current Assets 69,844 103,744 114,345 94,930 -65,974 -85,162 -49,452 -60,144 Application of Funds 407,626 460,390 497,830 508,506 371,813 378,490 443,601 482,015 E: MOSL Estimates

HPCL

22 August 2016 9

Financials and Valuations

Ratios

Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E Basic (INR)

EPS 45.4 26.9 26.7 51.1 80.6 113.9 133.4 142.0 Cash EPS 86.9 77.4 83.7 115.7 138.8 192.6 217.0 233.1 Book Value 370.1 387.1 404.9 442.8 472.6 546.2 632.8 725.0 DPS 14.0 8.5 8.5 15.5 24.5 34.5 40.0 42.6 Payout (incl. Div. Tax.) 36.1 37.0 37.3 35.5 35.6 35.4 35.1 35.1

Valuation (x)

P/E 45.2 45.5 23.7 15.1 10.7 9.1 8.6 Cash P/E 15.7 14.5 10.5 8.8 6.3 5.6 5.2 EV / EBITDA 18.6 16.9 12.7 9.4 6.5 5.4 5.3 EV / Sales 0.4 0.3 0.3 0.2 0.3 0.3 0.3 Price / Book Value 3.1 3.0 2.7 2.6 2.2 1.9 1.7 Dividend Yield (%) 0.7 1.3 2.0 2.8 3.3 3.5

Profitability Ratios (%)

RoE 12.8 7.1 6.7 12.1 17.6 22.4 22.6 20.9 RoCE 5.6 5.0 4.2 5.4 7.3 11.4 12.0 11.4 RoIC 5.6 4.5 3.8 5.8 7.8 14.4 15.7 15.3 Turnover Ratios

Debtors (No. of Days) 7.1 6.4 7.5 8.5 8.0 8.0 8.5 8.4 Asset Turnover (x) 4.8 5.6 5.9 5.6 4.6 3.5 3.2 3.0

Leverage Ratio

Debt / Equity (x) 2.0 2.3 2.4 2.1 1.1 0.8 0.8 0.7

Cash Flow Statement

(INR Million) Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E OP/(Loss) before Tax 23,461 12,192 14,746 26,155 41,541 57,381 67,930 71,831 Depreciation 14,082 17,129 19,344 21,884 19,712 26,668 28,346 30,894 Other op -2,456 -5,407 -10,771 -1,556 -6,772 -5,536 -7,711 -9,006 Interest Paid 6,457 21,392 20,193 13,364 7,066 6,401 6,316 6,738 Direct Taxes Paid -5,645 -2,715 -1,072 -3,668 -7,622 -11,685 -19,053 -16,521 (Inc)/Dec in Wkg. Capital -25,876 -27,301 -30,945 21,121 124,486 20,500 5,391 1,973 CF from Op. Activity 10,024 15,291 11,496 77,301 178,411 93,729 81,218 85,910

(Inc)/Dec in FA & CWIP -46,101 -41,359 -36,807 -41,358 -41,762 -55,000 -52,000 -80,000 Free Cash Flow -36,077 -26,068 -25,312 35,943 136,649 38,729 29,218 5,910 (Pur)/Sale of Investments 5,371 6,378 -2,404 -1,297 4,161 2,468 -5,748 0 Inc from Invst 6,919 6,345 5,505 4,906 4,688 5,536 7,711 9,006 CF from Inv. Activity -33,810 -28,636 -33,706 -37,748 -32,913 -46,996 -50,037 -70,994

Inc / (Dec) in Debt 30,408 37,919 37,072 -25,648 -123,807 -25,336 32,100 0 Interest paid & other Inv -8,933 -14,836 -22,187 -17,045 -7,647 -6,401 -6,316 -6,738 Dividends Paid -4,731 -5,509 -3,344 -3,367 -6,136 -13,684 -15,865 -16,896 CF from Fin. Activity 16,744 17,574 11,540 -46,060 -137,590 -45,421 9,919 -23,634

Inc / ( Dec) in Cash -7,042 4,229 -10,670 -6,507 7,908 1,312 41,101 -8,718 Add: Op. Balance 2,431 800 2,264 1,471 347 171 1,483 42,584 Bank Balance Adj. 5,410 -2,766 9,877 5,383 -8,084 0 0 0 Closing Balance 800 2,264 1,471 347 171 1,483 42,584 33,865 E:MOSL Estimates

HPCL

22 August 2016 10

Corporate profile Exhibit 1: Sensex rebased

Source: MOSL/Bloomberg

Exhibit 2: Shareholding pattern (%)

Jun-16 Mar-16 Jun-15 Promoter 51.1 51.1 51.1 DII 14.5 14.0 15.5 FII 19.4 19.3 18.9 Others 15.0 15.6 14.6

Note: FII Includes depository receipts Source: Capitaline

Exhibit 3: Top holders Holder Name % Holding

LIC of India 2.6 HDFC Standard Life Insurance Co.Limited 1.5 National Westminister Bank PLC as Trustee of The Jupiter India Fund 1.2

Source: Capitaline Exhibit 4: Top management

Name Designation Nishi Vasudeva Chairman & Managing Director J Ramaswamy Director (Finance) & CFO Pushp Kumar Joshi Director (Human Resources) Y K Gawali Director (Marketing) Shrikant M Bhosekar Company Secretary

Source: Capitaline

Exhibit 5: Directors Name Name

Nishi Vasudeva Pushp Kumar Joshi Sandeep Poundrik Y K Gawali J Ramaswamy B K Namdeo Anand Kumar Singh Gitesh K Shah*

Exhibit 6: Auditors Name Type

CVK & Associates Statutory G M Kapadia & Co Statutory Upendra Shukla Secretarial Audit CMA Rohit J Vora Cost Auditor R Nanabhoy & Co Cost Auditor Sriramamurthy & Co Branch

Source: Capitaline

Exhibit 7: MOSL forecast v/s consensus EPS

(INR) MOSL

forecast Consensus

forecast Variation

(%) FY17 133.4 124.7 7.0 FY18 142.0 125.7 12.9

Source: Bloomberg

Company description Fortune-500 company, HPCL is a refining and marketing company in India and also has interests in upstream. It owns 14.8mmt of refining capacity, split across Mumbai (6.5mmt) and Vishakapatnam (8.3mmt). It has a crude and product pipeline network of ~2,400km and sells ~30mmt of petroleum products. HPCL also holds a 16.9% stake in MRPL and 49% stake in 9mmt Bhatinda refinery. HPCL is a state-owned company, with 51.1% Government of India (GoI) stake.

HPCL

22 August 2016 11

N O T E S

HPCL

22 August 2016 12

Disclosures This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company (ies) and/sector(s), if any, covered in the report and may be distributed by it and/or its affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur.

MOSt and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We and our affiliates have investment banking and other business relationships with a some companies covered by our Research Department. Our research professionals may provide input into our investment banking and other business selection processes. Investors should assume that MOSt and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may educate investors on investments in such business . The research professionals responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting information. Our research professionals are paid on twin parameters of performance & profitability of MOSt. MOSt generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, MOSt generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing among other things, may give rise to real or potential conflicts of interest. MOSt and its affiliated company(ies), their directors and employees and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the affiliates of MOSt even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report Reports based on technical and derivative analysis center on studying charts company's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamental analysis. In addition MOST has different business segments / Divisions with independent research separated by Chinese walls catering to different set of customers having various objectives, risk profiles, investment horizon, etc, and therefore may at times have different contrary views on stocks sectors and markets.

Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. Any statements contained in this report attributed to a third party represent MOSt’s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. This Report is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. While we would endeavor to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.

Most and it’s associates may have managed or co-managed public offering of securities, may have received compensation for investment banking or merchant banking or brokerage services, may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Most and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. Subject Company may have been a client of Most or its associates during twelve months preceding the date of distribution of the research report

MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000000412

Pending Regulatory inspections against Motilal Oswal Securities Limited: SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold inquiry and adjudge violation of SEBI Regulations; MOSL replied to the Show Cause Notice whereby SEBI granted us an opportunity of Inspection of Documents. Since all the documents requested by us were not covered we have requested to SEBI vide our letter dated June 23, 2015 to provide pending list of documents for inspection.

List of associate companies of Motilal Oswal Securities Limited -Click here to access detailed report Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues Disclosure of Interest Statement HINDUSTAN PETROLEUM C Analyst ownership of the stock No Served as an officer, director or employee No A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes

Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For Hong Kong: This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in Hong Kong.

For U.S Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.

This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

For Singapore Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.

In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Varun Kumar Kadambari Balachandran [email protected] [email protected] Contact : (+65) 68189232 (+65) 68189233 / 65249115 Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931

Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: [email protected]