Oil - Downstream - Update - Jan 15

SECTOR UPDATE 8 JAN 2015

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).

SECTOR PERSPECTIVE

COMPANY# Rating MCap (Rs bn)

EBITDA (Rs bn) PAT (Rs bn) RoE (%) FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E

BPCL BUY 466 80.9 49.3 71.5 89.0 40.6 23.4 38.7 49.7 22.5 11.6 17.4 19.8 HPCL BUY 193 52.4 45.5 54.3 67.1 17.7 17.8 23.5 31.2 12.4 11.4 13.9 16.7 IOC BUY 813 156.1 116.1 161.8 210.5 58.5 41.4 70.3 98.1 9.2 6.1 9.9 12.8 Source: Company, HDFC sec Inst Research, # all numbers are standalone * Hindi for ‘the good times’

Absolute Stock Returns (%) 1M 3M 1Y

BPCL (6.4) (0.9) 99.3

HPCL 0.4 17.2 156.5

IOC (2.3) (6.2) 67.8 Valuation (on FY17E Standalone)

P/E (x) P/BV (x) Investments (Rs/sh)

BPCL 9.4 1.7 214

HPCL 6.2 1.0 149

IOC 2.1 1.0 120 Target Upside

CMP (Rs/sh)

TP (Rs/sh)

Upside (%)

BPCL 645 790 22.6

HPCL 569 740 30.1

IOC 335 425 26.7

Satish Mishra [email protected] +91-22-6171-7334

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

DOWNSTREAM OIL: SECTOR UPDATE

Summary

BPCL HPCL IOC

Key Arguments

Marketing to refining ratio of 1.5x. Marketing contributes ~64% to EBITDA

Best return ratios amongst OMCs

Exposure in E&P through stakes in JVs across Mozambique and Brazil. Contributes ~14% to TP

Highest marketing to refining ratio of 2.0x. Marketing contributes ~82% to EBITDA. Best proxy for diesel margins expansion

Maximum benefits from lower oil under recovery and debt reduction

Marketing to refining ratio of 1.5x. Marketing contributes ~43% to EBITDA

~20% of EBITDA comes from the stable pipelines business

15 mTpa Paradeep refinery with Nelson complexity index of 11 will be commissioned in FY16

Benefits from lower oil UR in FY17 over FY14

Benefit Additional EPS (Rs/sh)

Lower net under recovery 3.4

Lower interest cost

6.9



Lower interest cost

13.7



Lower interest cost

4.9

Benefits from diesel marketing margin expansion

10% rise in diesel mktg margins leads to a 5.2% jump in FY14 PBT



Target Valuation (on FY17E)

Business EBITDA share

EV/EBITDA multiple

Refining 29% 4.0 Marketing 64% 5.0 Pipelines 6% 8.0

Traded investments @ 35% discount to CMP

Investments value Rs 214/sh Target Rs 790/sh, BUY


EV/EBITDA multiple

Refining 9% 2.5 Marketing 82% 5.0 Pipelines 10% 8.0




EV/EBITDA multiple

Refining 29% 3.5 Marketing 43% 5.0 Pipelines 20% 8.0 Petchem 8% 4.0



Source: HDFC sec Inst Research

Page | 2

DOWNSTREAM OIL : SECTOR UPDATE

BPCL – 1-year forward P/BV and RoE

HPCL – 1-year forward P/BV and RoE

IOC – 1-year forward P/BV and RoE

BPCL

LT avg 1-year fwd P/BV = 0.9x

LT avg 1-year fwd RoE = 10.7%

Long Term (P/BV)/RoE = 8.7 HPCL



Long Term (P/BV)/RoE = 9.3 IOC



Long Term (P/BV)/RoE = 7.6

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Page | 3


Recap of the past decadeIncreasing energy demand led by robust GDP growth

India’s GDP grew at an average rate of 7.5% over the last decade (2004-2013). Strong GDP growth and increasing urbanization led to an average energy consumption growth of 6.4% over the period.

Using the historical base, India’s energy requirement will grow at 0.84x the GDP growth. This ratio is further set to increase led by the government’s renewed focus on industrialization.

Increasing urbanization and rising discretionary spends led to an above average growth for auto fuels (petrol + diesel) in India. Demand for auto fuels grew at an average rate of 6.7% over the last decade.

Increasing penetration of LPG and declining consumption of SKO resulted in consumption CAGR of 5.4% for sensitive products (auto fuels, LPG, SKO). LPG consumption registered a CAGR of 5.8% over the period while SKO witnessed a decline of 3.5%.

India’s GDP growth and Energy consumption multiplier

Source: Govt reports, BP, HDFC sec Inst Research

Consumption growth of sensitive products in India

Source: PPAC, Govt reports, HDFC sec Inst Research

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0.2

0.4

0.6

0.8

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GDP Gr (%)Avg GDP Gr (%)Avg Energy Multiplier (RHS)%

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Sensitive Product Gr (%) Auto Fuel Gr (%)

Avg Sens prod (%) Avg Auto fuel (%)

Page | 4


Other associated variables were against India

There are three associated variables along with consumption that explain the financial health related to crude dynamics. They are (a) share of oil imports (b) INR-USD exchange rate and (c) crude prices.

India’s petroleum products consumption increased to 158 mnT in FY14 vs. 108 mnT in FY04. This increase was despite the fall in oil’s share in the total energy mix from ~36% to ~29% over the period.

However, domestic oil production remained broadly flat with a minor increase from ~34 mnT to ~38 mnT over the last decade. Consequently, the share of oil imports increased from 71% to 78%.

Problems further aggravated on the back of a weakening currency and hardening crude prices.

Crude prices increased 2.6x over the past decade from USD 42/bbl to USD 108/bbl in FY14.

INR depreciated by 36% from 45 to 61 against the USD over the same period.

To sum up, all the three variables which could have supported India in the scenario of rising energy demand, worsened over the period.

Rising crude demand-supply mismatch


Currency and crude price movement


42

58

64

82

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70

87

114

110

108

45 44 45 40 46 47 46

48 55 61

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Crude (USD/bbl) INR-USD (RHS)

$/bbl

68%69%70%71%72%73%74%75%76%77%78%79%

-20 40 60 80

100 120 140 160 180

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Production (mn T) Consumption (mn T)Import Share (%)

mn T

Page | 5


Delayed recognition of the problem

Inadequate response from government during FY05-10

The combined impact of a weakening currency (~6%) and hardening crude prices (~65%) over FY05-10 was ~74% (~12% CAGR).

Despite the widening demand-supply mismatch, the Indian government was less pro-active in taking precautionary measures.

Increase in retail selling prices (RSP) of the sensitive products was marginal over FY05-10 :

o SKO : ~2% absolute, 0.5% CAGR o HSD : ~42% absolute, 7.3% CAGR o MS : ~21% absolute, 3.9% CAGR o LPG : ~7% absolute, 1.4% CAGR

Bold actions FY10 onwards helped marginally

2009 was a crucial year in decision making for the Indian government. Fuel subsidy crossed Rs 1tn in FY09 and India’s general elections concluded in May-09, with the UPA government getting a clear mandate for a second tenure.

MS (petrol) was decontrolled in FY10 with serious price hikes in sensitive products’ RSP between FY10-14.

o SKO : ~62% absolute, 13% CAGR o HSD : ~69% absolute, 14% CAGR o LPG : ~46% absolute, 10% CAGR o MS : ~57% absolute, 12% CAGR (Decontrolled)

Retail selling prices of sensitive products


Retail selling prices of sensitive products


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SKO HSD MS LPG (RHS)

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Page | 6


Situation remained tight till FY14

Despite the decontrol of petrol and regular hikes in retail prices of other sensitive products, the situation didn’t improve significantly over FY10-14. This was again due to a depreciating INR (27% over FY10-14) and hardening crude prices (55% over the period).

Government’s stance remained tough with diesel (contributes ~50% of under recovery) prices being raised from Rs 31/L in FY10 to Rs 55/L by FY14, despite the high inflation. Price hikes were less aggressive for SKO/LPG due to consumers’ profile and political compulsions.

Diesel RSP vs. UR

Source: PPAC, HDFC sec Inst Research

SKO RSP vs. UR


LPG RSP vs. UR


Average oil under recovery for FY12-14 was ~Rs 1.5tn p.a., the biggest hazard to India’s fiscal health.

Total oil under recover (Rs tn)

Sources : PPAC, Govt reports, HDFC sec Inst Research

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Petrol Diesel SKO LPG Total

Rs tn

Oil under recovery increased by ~7x times over the last decade

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Page | 7


FY15 : A new chapter for the Oil & Gas sector

India witnessed a series of positive developments from the beginning of FY15. The first half was dominated by rising hopes post the full majority to a single party in the Lok Sabha elections.

The new government kick started the momentum with a series of positive policy actions. Continued diesel price hikes, new gas pricing policy, impetus on the DBT (direct benefits transfer) for LPG and hike in excise duty for auto fuels were the initial moves.

A positive surprise came in the form of crude prices falling more than 40% in the last three months to USD 60/bbl. Rising contributions from shale oil and a lack of coordination between the OPEC suggest that prices will remain weak. Our base case for FY16 and FY17 is USD 80/bbl.

Improving fiscal health and a better outlook has helped the INR counter the sharp depreciation of emerging market currencies against the USD. The INR-USD has been in the range of 61-64 so far. Our base case for FY16 and FY17 is 63.

Currency and crude price movement


9MFY15 has seen a significant improvement in an under recovery scenario

o Diesel : UR is zero since Sep-14 with a cut of Rs 6.5/L in RSP. Diesel is now a decontrolled product.

o LPG : UR is down from Rs 606/cyl in Mar-14 to Rs 280/cyl in Dec-14.

o SKO : UR is down from Rs 36/L to Rs 25/L in Dec-14.

Diesel RSP vs. under recovery


LPG RSP vs. under recovery


SKO RSP vs. under recovery


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Page | 8


Future Energy Scenario : India Based on an energy multiplier of ~0.8x, India’s energy need will rise at a CAGR of 5% to sustain the average GDP growth of 6.7% over the next decade. We analyse the potential of existing energy sources to meet future demand.

COAL

Coal will remain the major energy source with more than 50% contribution. Currently domestic/import forms 80/20% of the total requirement

Coal India contributes ~80% of the domestic supply. Supply from Coal India has grown at a CAGR of 3% over the last 5 years. Even with removal of railway bottlenecks and environmental clearance, we anticipate a production growth of no more than 5-7% in the near future

Imports will continue to rise. However, port limitations will keep growth in the range of ~10% Coal contribution will remain at 53-55%. No major change expected

OIL

Oil consumption (~3.8 bbl/d) has increased at a CAGR of ~4.2% over the last decade Domestic oil production growth was muted at ~1.2% with domestic sources contributing ~24% of the

total need We expect the govt to incentivise domestic producers to boost domestic production However, with domestic product growth remaining at 1-3%, the proportion of imports is set to rise Oil contribution will remain at 29-30% with rising imports. Govt will incentivise gas usage;

however, we don’t see any significant domestic gas addition in the near future

OTHERS (incl.

RENEWABLE)

Nuclear (1%), renewable (2%) and hydroelectric (5%) contribute 8% of the total requirement Nuclear, wind and solar are relatively small contributors, and even if they grow at a faster pace,

India’s energy dynamics will not change India has a huge opportunity with regards to hydroelectric power (just ~25% is tapped so far).

However, long gestation period (~10 years for large projects) restricts any major near term additions Contribution will remain at 8-9%. No major change expected

NATURAL GAS

Gas is cleaner (vs. coal/oil), cheaper (vs. oil) and easy to use. As against global share of 24%, gas accounts for just 9% of India’s energy needs

~78% of oil is imported. Thus, ~22% of the energy demand can be replaced with low cost gas We expect both domestic (driven by favourable govt policies) and imported gas supply to increase Contribution will keep on rising (govt predicts it to double by 2030).

Our View : Oil’s share will remain at 29-30%. There can be higher consumption in the near future as at current crude prices, fuel oil is cheaper than RLNG.

0%

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50%

60%

70%

80%

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Coal 55%

Oil 29%

Others 8%

Natural Gas 8%

India’s Energy Mix CY13

(Source: BP, HDFC sec Inst Research)

Page | 9


Way Ahead

We believe the following are key triggers for OMCs in the coming future :

Sustained volume growth despite private entrants

Substantial reduction in oil under recovery

Reduction in govt receivables, debt and interest cost

Increase in marketing margins

(A) Sustained volume growth for OMCs despite the entry of private players in auto fuel market

Our base assumption for average GDP growth for India is 6.5/7% for the next 3/5 years starting FY16. Corresponding growth in auto fuels demand should be 5.6% and 6% respectively.

We expect private players (RIL and Essar oil) to be back in the market. However, due to a bitter experience in 2006-07, they will be more cautious in expanding their network.

We assume that by FY17, ~1,400 retail outlets will be operational for both RIL and EOL (same as 2006).

However, the situation is less frightening for OMCs as their ROs have almost doubled from 26k to 50k over the period.

Even with aggressive modeling of 8% growth for private ROs vs. 4% for OMCs, we see substantial room for OMCs’ volumes to grow.

Our model is based on OMCs’ average auto fuels volume growth of 1.7/1.5% for the next 3/5 years starting FY16 vs. auto fuels demand growing at 5.6/6%.

Strong auto fuels demand led by robust GDP growth


Retail outlet (RO) growth by PSU and private players


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KL/RO/m

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Page | 10


(B) Substantial reduction in oil under recovery

Lower crude prices are a blessing for the Indian economy. A stable government, focus on growth and an improving economic scenario should increase FDI/FII inflow in India. This should protect from a sharp devaluation of the INR vs. USD.

Our base case assumption :

o FY16 : Crude at USD 80/bbl, INR-USD at 63, LPG/SKO volume growth at 6/0% YoY

o FY17 : Crude at USD 80/bbl, INR-USD at 63, LPG/SKO volume growth at 6/0% YoY

o OMCs’ UR sharing fixed at 1.5% for FY16/17

FY16 oil UR (Rs bn) sensitivity with INR and crude INR-USD

59 61 63 65 67

Crud

e (U

SD/b

bl) 50 29 40 52 64 77

65 150 172 195 219 245 80 322 359 397 437 479 95 546 601 659 718 780

110 823 899 979 1,062 1,148

FY17 oil UR (Rs bn) sensitivity with INR and crude INR-USD 59 61 63 65 67

Crud

e (U

SD/b

bl) 50 15 26 38 50 64

65 137 159 183 207 233 80 312 349 389 429 472 95 541 597 656 717 781

110 824 903 985 1,070 1,159

Our crude price assumption is ~30% higher than the current prices, thus protecting from any negative surprise to our numbers to a large extent.

We have also not considered any benefits from DBT or check on SKO leakages.

Oil under recovery breakup for India


Under recovery sharing by different players


782

1,385 1,610

1,399

627

397 389

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1,000 1,200 1,400 1,600 1,800

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FY13

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FY16E

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Petrol Diesel SKO LPG Total

Rs bn

410

835 1000

708

194 159 204

303

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670

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Government Upstream OMCs

Rs bn

Page | 11


(C) Lower UR = lower receivables/debt/interest

The past...

Government bore ~58% of the UR burden over FY12-14 averaging at ~Rs 850bn/year.

Higher subsidy burden coupled with the widening fiscal deficit led to a delay in payments from the government. Consequently govt receivables to OMCs increased to ~Rs 400bn.

High receivables resulted in total debt rising from ~Rs 0.9tn in FY11 to ~Rs 1.3tn in FY14 for OMCs. Consequently, interest cost increased from ~Rs 50bn to ~Rs 90bn.

The future...

Government will need to bear only ~40% of the UR burden at ~Rs 200bn/year.

Government receivables will reduce to ~Rs 65bn. Consequently, debt and interest cost for OMCs will reduce by ~40% by FY17. These reductions are post including debt and interest cost due to the Paradeep refinery. Excluding them, interest reduction will look even more attractive.

Reduction in the interest cost alone will lead to an additional earnings of ~Rs 6.9/13.7/4.9 for BPCL/HPCL/IOC.

Even net UR to OMCs will decline from ~Rs 21bn in FY14 to ~Rs 6bn in FY17. Lower net UR will lead to an additional EPS of Rs 3.4/6.9/2.1 for BPCL/HPCL/IOC.

Total under recovery vs. government receivables


Declining debt and interest cost for OMCs


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500

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2,000

FY11

FY12

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E

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E

BPCL Gross UR HPCL Gross URIOC Gross UR Govt Total Receivables (RHS)

Rs bnRs bn

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100

120

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1,000 1,200 1,400 1,600

FY11

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BPCL Debt HPCL Debt

IOC Debt Total Interest Cost RHS

Rs bn Rs bn

Page | 12


(D) Increase in marketing profitability led by diesel

Sensitive products (petrol, diesel, SKO, LPG) accounted for ~65% of total sales volumes in FY10. Government fixed the retail prices, dealer margins and OMCs’ marketing margins on these products. Consequently OMCs were not allowed to increase margins on these products and were artificially kept lower than other countries.

Post the decontrol of petrol in FY10, there was a regular increase in OMCs’ margins on petrol. As per the management, margins have been raised by 20-30% post the decontrol. Petrol contributes 10-15% of OMCs product portfolio.

Average marketing margins (Rs/t) for all sensitive and non-sensitive products put together have increased by 10-15% over FY11 to FY14 for all the three OMCs.

Despite an increase in marketing costs, gross margins on diesel were kept fixed at Rs 1.4/L for the last five years. Diesel has been decontrolled effective Oct-14. We expect a similar margin expansion trend will be witnessed in diesel as was seen for petrol. Diesel accounts for 45-55% of the product portfolio, and hence any increase in diesel margins will significantly add to the bottom line.

Expansion in diesel and marketing margin


Incremental boost from 10% increase in diesel margins

Diesel Vol. FY14 (mn T)

PBT FY14 (Rs bn)

Incremental PBT (Rs bn)

(%) increase)

BPCL 18.3 220 3.1 5.2% HPCL 16.0 167 2.7 10.1% IOC 36.9 511 6.2 6.3%

Source: Company, HDFC sec Inst Research

1.00

1.25

1.50

1.75

2.00

-

1,000

2,000

3,000

4,000

5,000

6,000

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

BPCL HPCL IOC Diesel Margin RS

Rs/lRs/t

Though we have built-in an expansion in diesel margins, we remain cautious due to the entry of efficient private players. Our base case assumes no margin expansion in FY15 and 10%/year FY16 onwards. We believe that it will take more than 5 years for diesel to match the margins on petrol.

Page | 13

COMPANY UPDATE 8 JAN 2015

Bharat Petroleum Corporation BUY

Strength from multiple businesses Investments in E&P assets give BPCL an edge over other OMCs. Further, marketing to refining ratio of 1.5x (34 vs 23 mnT) coupled with ~78% gross profit (standalone) from the marketing segment make BPCL a key beneficiary of the diesel decontrol.

Diesel margins have been fixed at Rs 1.4/L (vs. Rs 2+/L for petrol) for over five years. Strong economic outlook, lower inflation and lower retail prices today provide room for an increase in diesel margins. However, we remain cautious due to the entry of efficient private players. Our base case assumes margin growth of 0%/10%/10% in FY15/16/17 and auto fuels vol growth of ~2% vs. ~5.4% for the sector.

We expect BPCL’s gross UR to reduce to ~Rs 97bn in FY16/17 from Rs 345bn in FY14. Consequently, all associated business parameters such as net UR/total debt/interest cost are expected to fall from Rs 5.1/ 200/13.6 bn in FY14 to Rs 1.4/121/6.1 bn by FY17.

Clarity on the E&P business is a key for BPCL. Post formation of the new govt in Mozambique in Oct-14, the certification/FID process is likely to expedite. Falling crude/gas prices are key risks to valuations.

Higher EBITDA and lower debt will boost BPCL’s RoE/RoCE to 20/13% in FY17. We upgrade BPCL to BUY with an SOTP target of Rs 790 (~4.9x FY17E EV/EBITDA for standalone biz, Rs 103/sh from upstream and Rs 111/sh from other investments).

Boost from the diesel decontrol : Diesel accounts for ~54% of BPCL’s marketing volumes with the marketing segment contributing ~78% to gross profit. Every 10% (Rs 0.14/L) increase in diesel margins will add an EPS of ~Rs 2.9/sh (FY14 EPS was Rs 56.2/sh).

Benefits from lower under recovery : BPCL’s gross UR will reduce from Rs 345bn in FY14 to ~Rs 97bn in FY16/17. This will have multiple benefits (1) net UR will reduce from Rs 5.1bn to Rs 1.4bn. This will add an EPS of Rs 3.4/sh (2) Total debt/interest cost will reduce from Rs 200/13.6 bn in FY14 to Rs 121/6.1 bn by FY17. Interest savings will add an EPS of Rs 6.9/sh.

Valuation : Excluding the value of investments, BPCL is trading at 1.2x/6.3x/4.3x of FY17E BV/EPS/EV-EBITDA.

Risks : (1) Sharp volatility in crudes prices/exchange rate (2) Higher UR sharing (3) Above expected aggression by the private players to capture retail market share (4) Delay in E&P monetisation

FINANCIAL SUMMARY (Standalone) (Rs bn) FY13 FY14 FY15E FY16E FY17E Net Sales 2,401.16 2,600.61 2,238.47 2,061.55 2,063.16 EBITDA 61.07 80.86 49.27 71.52 89.01 PAT 26.43 40.61 23.40 38.73 49.69 EPS (Rs) 36.6 56.2 32.4 53.6 68.7 P/E (x) 17.6 11.5 19.9 12.0 9.4 P/BV (x) 10.3 7.6 10.9 7.5 6.1 RoE (%) 16.8 22.5 11.6 17.4 19.8 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS

CMP (as on 7 Jan 2015) Rs 645

Target Price Rs 790 Nifty 8,102

Sensex 26,909

KEY STOCK DATA Bloomberg/Reuters BPCL IN/BPCL.BO

No. of Shares (mn) 723

MCap (Rs bn) / ($ mn) 466/7,375

6m avg traded value (Rs mn) 1,126

STOCK PERFORMANCE (%)

52 Week high / low Rs 785/315

3M 6M 12M

Absolute (%) (0.9) 8.7 99.3

Relative (%) (3.3) 5.6 69.3

SHAREHOLDING PATTERN (%)

Promoters 54.93

FIs & Local MFs 15.78

FIIs 12.57

Public & Others 16.72 Source : BSE



BPCL : COMPANY UPDATE

Lower Govt receivables = lower debt/interest

The past…

BPCL’s gross oil under recovery increased to ~Rs 350bn/year during FY12-14. Despite subsidy sharing from national oil upstream players (ONGC and OIL), the government was required to bare ~56% (~Rs 200bn per year) of the burden.

Higher UR sharing by the government despite weaker financial health led to a delay in subsidy payments. Consequently, ~58% of total government share for FY14 was unpaid by the year end.

Higher receivables led to higher debt and consequently higher interest cost.

The future…

BPCL’s gross oil under recovery will decline to ~Rs 97bn/year FY16 onwards. Government sharing will reduce to one-fourth to ~Rs 45bn/year.

Lower government sharing will lead to lower receivables and timely payments. Consequently, BPCL’s total debt will reduce by ~40% to ~Rs 121bn.

Hence, total interest cost will reduce by ~55%. Interest reduction alone will add ~Rs 6.9/share (~13% of FY14 EPS).

Declining gross under recovery and Govt. receivables


Lowering debt and interest cost


-2 4 6 8 10 12 14 16 18 20

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BPCL Gross UR Govt share

Govt Receivables Receivables/Govt Share (%)

Rs bn

Page | 15


Substantial benefits from the diesel decontrol

BPCL will be the next biggest beneficiary (after HPCL) from the margin expansion in diesel. Gross profit from the marketing division for BPCL is ~78%.

BPCL sold 34 mnT of petroleum products in FY14. Diesel contributed 54% (18 mnT) to the products portfolio. Gross margins for diesel were kept constant at Rs 1.4/L for over five years.

In the case of petrol, we saw that OMCs increased their margins by 20-30% post decontrol in 2012. Diesel has been decontrolled effective Oct-14 and thus, we expect margins to improve sequentially.

Current margins on diesel are Rs 1.4/L vs. Rs 2+/L on petrol. Though we have built-in the expansion in diesel margins, we remain cautious due to the entry of efficient private players. Our base case assumes no margin expansion in FY15 and 10% p.a. FY16 onwards. We believe it will take more than 5 years for diesel to match the margins on petrol.

Every Rs 0.14/L (10%) increase in diesel margins has a favourable impact of 5.2% on BPCL FY14 earnings.

FY17 EPS sensitivity with diesel’s gross margin Diesel Margin (Rs/L) 1.4 1.5 1.7 1.9 2.0 EPS FY17 (Rs/sh) 62.4 65.4 68.7 72.4 76.4 Bear case : No increase in diesel’s margin Base case : no change in FY15 and 10% p.a. increase in FY16/17 Bull case : Margins reaching Rs 2/l by FY17

Gross profit contribution from different segments


Rising marketing and diesel margins


17 25 14

26 22 12 19 20

81 72 82

69 74 84 77 76

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FY10

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Refining Marketing Pipeline

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Marketing Margins (Rs/t) Diesel Margins (Rs/l) (RHS)

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Page | 16


Improvement in profitability and debt reduction FY15 will be tough given the anticipated inventory

losses. However, we expect profitability to improve in FY16/17 led by higher marketing margins and lower debt.

Lowering debt and rising profitability


Expansion in return ratios We expect return ratios to remain muted in FY15 and to

improve sequentially. We expect RoE/RoIC to improve to 20/15% by FY17. It will give a dividend yield of ~3% in FY17.

Rising returns


FY16E EPS Sensitivity

Diesel Margin (Rs/KL) 1,400 1,470 1,540 1,610 1,680

GRM

($/b

bl) 2.8 40.3 41.8 43.3 44.8 46.3

3.3 45.5 47.0 48.4 49.9 51.4 3.8 50.6 52.1 53.6 55.1 56.6 4.3 55.7 57.2 58.7 60.2 61.7 4.8 60.8 62.3 63.8 65.3 66.8

Crude price (USD/bbl)

60 70 80 90 100

INR-

USD

59 52.1 51.8 51.4 50.9 50.3 61 53.3 52.9 52.5 51.9 51.3 63 54.4 54.0 53.6 53.0 52.3 65 55.6 55.2 54.7 54.0 53.3 67 56.8 56.3 55.8 55.1 54.3

FY17E EPS Sensitivity

Diesel Margin (Rs/KL)

1,400 1,540 1,694 1,863 2,050

GRM

($/b

bl) 3.5 52.1 55.2 58.5 62.1 66.2

4.0 57.2 60.3 63.6 67.3 71.3 4.5 62.4 65.4 68.7 72.4 76.4 5.0 67.5 70.5 73.8 77.5 81.5 5.5 72.6 75.6 79.0 82.6 86.6

Crude price (USD/bbl) 60 70 80 90 100

INR-

USD

59 66.8 66.5 66.1 65.6 65.0 61 68.2 67.8 67.4 66.8 66.2 63 69.6 69.2 68.7 68.1 67.4 65 71.0 70.6 70.0 69.4 68.7 67 72.4 71.9 71.4 70.7 69.9

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RoE RoIC Dividend Yield

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Page | 17


ASSUMPTIONS

FY12 FY13 FY14 FY15E FY16E FY17E FY18E Refining Business Throughput (mnT) 22.9 23.2 23.4 23.4 23.4 23.4 23.4 GRM (US$/bbl) 3.2 5.0 4.3 2.1 3.8 4.5 5.0 Marketing Business Total Sales (mnT) 31.1 33.3 34.0 34.8 35.7 36.6 37.5 YoY Gr (%) 6.4 6.9 2.1 2.5 2.5 2.5 2.5 Diesel Volume (mn T) 16.3 18.0 18.3 18.5 19.0 19.2 19.4 Diesel Volume Gr (%) 13.2 10.3 11.3 1.0 2.5 1.1 1.1 Petrol Volume Gr (%) 6.1 7.0 8.4 5.0 4.0 1.3 1.3 Diesel's Margin (Rs/l) 1.40 1.40 1.40 1.40 1.54 1.69 1.86 Macro INR-US$ 47.9 54.5 60.5 61.3 63.0 63.0 63.0 Crude Price (US$/bbl) 114.5 110.0 107.8 90.5 80.0 80.0 80.0 Total Sector UR (Rs bn) 1,385 1,610 1,399 627 397 389 377 BPCL gross UR (Rs bn) 326 390 345 155 98 96 93 BPCL net UR (Rs bn) 0.1 2.5 5.1 2.3 1.5 1.4 1.4 Source : Company, HDFC sec Inst Research VALUATION (Based on FY17) Business EBITDA (Rs bn) Multiple Value (Rs bn) Value (Rs/sh)* Valuation basis Standalone Refining & Marketing 89.01 4.9# 436 664 EV/EBIDTA on FY17E Standalone net Debt 57 88 FY17E Standalone Equity Value 378 577 E & P Mozambique 0.85 134 204 15% discount to ONGC deal (10% @ $ 2.5bn) Brazil 13 19 Oil reserve of 200 mmboe @$5.0/bbl E&P EV 223 E&P Debt 79 120 FY17E (assuming Rs 10bn capex p.a. using debt) E&P Equity Value 103 Investments Traded investments 0.65 69 68 35% discount to CMP Non traded investments 0.85 33 42 20% discount to BV Investments Value 111 Value per share 790 Source : Company, HDFC sec Inst Research, * Valuation is based on 656 mn shares (net of treasury shares) # Refining 4.0x, Marketing 5.0x, Pipelines 8.0x

Page | 18


STANDALONE INCOME STATEMENT (Rs bn) FY12 FY13 FY14 FY15E FY16E FY17E Revenues 2,119.73 2,401.16 2,600.61 2,238.47 2,061.55 2,063.16 Growth % 39.8 13.3 8.3 (13.9) (7.9) 0.1 Raw Material 849.61 960.18 1,071.67 946.55 900.27 914.06 Trading 1,121.59 1,258.20 1,308.98 1,100.39 942.06 907.93 Employee Cost 22.61 27.69 28.96 28.81 30.25 31.77 Other expenses 87.25 94.03 110.13 113.45 117.45 120.38 EBITDA 38.67 61.07 80.86 49.27 71.52 89.01 EBITDA growth % 9.0 57.9 32.4 (39.1) 45.1 24.5 EBITDA Margin % 1.8 2.5 3.1 2.2 3.5 4.3 Depreciation 18.85 19.26 22.47 22.33 24.07 25.81 Other income 17.02 16.80 14.69 16.11 16.56 17.05 EBIT 36.84 58.61 73.08 43.05 64.01 80.26 Interest Cost 18.00 18.25 13.59 8.12 6.20 6.10 PBT 18.84 40.36 59.49 34.93 57.81 74.16 Taxes 5.73 13.93 18.88 11.53 19.08 24.47 RPAT 13.11 26.43 40.61 23.40 38.73 49.69 Excep items - - - - - - APAT 13.11 26.43 40.61 23.40 38.73 49.69 EPS 18.1 36.6 56.2 32.4 53.6 68.7 EPS Growth % (13.7) 101.6 53.7 (42.4) 65.5 28.3


STANDALONE BALANCE SHEET (Rs bn) FY12 FY13 FY14 FY15E FY16E FY17E SOURCES OF FUNDS Share capital 3.62 7.23 7.23 7.23 7.23 7.23 Reserves and surplus 145.52 159.11 187.36 202.64 227.83 260.18 Net Worth 149.14 166.34 194.59 209.87 235.07 267.41 LT Loans 21.59 55.08 118.08 88.08 86.08 84.08 ST Loans 190.87 180.58 81.84 36.84 36.84 36.84 Total Debt 212.46 235.67 199.92 124.92 122.92 120.92 Deferred tax liability 14.01 16.56 13.61 13.61 13.61 13.61 Other LT Liabilities 0.56 0.61 0.61 0.61 0.61 0.61 Long term provisions 4.10 10.92 11.57 11.57 11.57 11.57 Total liabilities 380.27 430.09 420.30 360.58 383.78 414.12 APPLICATION OF FUNDS Net fixed assets 166.12 166.90 179.38 187.05 192.98 197.17 Capital WIP 11.19 24.20 41.67 76.67 111.67 141.67 LT Investments 49.70 69.42 72.38 72.38 72.38 72.38 LT Loans and Advances 34.59 25.12 32.67 32.67 32.67 32.67 Other non current assets 0.01 0.28 1.66 1.66 1.66 1.66 Inventory 159.48 166.90 190.71 162.52 149.67 149.79 Debtors 63.78 40.25 40.80 33.73 31.06 31.09 Cash and Cash Equivalent 69.26 74.90 48.13 55.39 49.74 48.24 Loans and advances 7.93 11.58 9.41 9.41 9.41 9.41 Other current assets 94.00 90.16 107.47 20.05 15.00 16.54 Total current assets 394.45 383.80 396.52 281.10 254.89 255.08 Trade Payables 128.66 87.85 120.35 107.32 98.84 102.88 Other Current Liabilities 133.66 135.16 156.94 156.94 156.94 156.94 Provisions 13.48 16.61 26.69 26.69 26.69 26.69 Total current Liabilities 275.80 239.62 303.98 290.95 282.47 286.50 Net current assets 118.65 144.17 92.54 (9.85) (27.58) (31.42) Total Assets 380.27 430.09 420.30 360.58 383.78 414.12


Page | 19


STANDALONE CASH FLOW (Rs bn) FY12 FY13 FY14 FY15E FY16E FY17E Reported PAT 13.11 26.43 40.61 23.40 38.73 49.69 Non-operating income 7.47 8.71 9.84 10.79 11.09 11.43 PAT from Operations 5.64 17.72 30.77 12.61 27.64 38.26 Interest 18.00 18.25 13.59 8.12 6.20 6.10 Depreciation 18.85 19.26 22.47 22.33 24.07 25.81 Working Capital Change (57.98) (3.81) 16.58 109.66 12.07 2.35 OPERATING CASH FLOW ( a ) (15.49) 51.42 83.41 152.72 69.98 72.52 Capex (26.31) (33.15) (52.41) (65.00) (65.00) (60.00) Free cash flow (FCF) (41.81) 18.28 31.00 87.72 4.98 12.52 Non-operating income 11.40 11.26 9.84 10.79 11.09 11.43 Investments (0.25) (19.72) (2.96) - - - INVESTING CASH FLOW ( b ) (15.16) (41.61) (45.53) (54.21) (53.91) (48.57) Share capital Issuance - 3.62 - - - - Debt Issuance 47.88 23.20 (35.75) (75.00) (2.00) (2.00) Interest (18.00) (18.25) (13.59) (8.12) (6.20) (6.10) FFCE (11.92) 23.23 (18.34) 4.60 (3.22) 4.42 Dividend (4.55) (9.23) (14.26) (8.12) (13.54) (17.34) Others (0.00) (3.61) 1.90 0.00 - - FINANCING CASH FLOW ( c ) 25.34 (4.28) (61.70) (91.24) (21.73) (25.44) NET CASH FLOW (a+b+c) (5.31) 5.54 (23.82) 7.27 (5.66) (1.49) Closing Cash & Equivalents 69.26 74.90 48.13 55.39 49.74 48.24


STANDALONE KEY RATIOS FY12 FY13 FY14 FY15E FY16E FY17E

PROFITABILITY % EBITDA margin 1.8 2.5 3.1 2.2 3.5 4.3 EBIT margin 1.7 2.4 2.8 1.9 3.1 3.9 APAT margin 0.6 1.1 1.6 1.0 1.9 2.4 RoE 9.1 16.8 22.5 11.6 17.4 19.8 Core RoCE 6.0 10.0 13.6 6.8 12.9 15.3 RoCE 7.1 9.5 11.6 7.3 11.5 13.4 EFFICIENCY Tax rate % 30.4 34.5 31.7 33.0 33.0 33.0 Total Asset turnover (x) 6.0 5.9 6.1 5.7 5.5 5.2 Inventory (days) 27 25 27 27 27 27 Debtor (days) 11 6 6 6 6 6 Payables (days) 22 13 17 18 18 18 Cash conversion cycle (days) 16 18 16 15 15 14 Net Debt/EBITDA (x) 3.7 2.6 1.9 1.4 1.0 0.8 Net D/E 1.0 1.0 0.8 0.3 0.3 0.3 Interest coverage 2.0 3.2 5.4 5.3 10.3 13.2 PER SHARE DATA EPS (Rs) 18.1 36.6 56.2 32.4 53.6 68.7 CEPS (Rs) 88.4 63.2 87.2 63.2 86.9 104.4 DPS (Rs) 11.0 11.0 17.0 9.6 16.0 20.5 BV (Rs) 412.5 230.0 269.1 290.2 325.1 369.8 VALUATION P/E (x) 35.6 17.6 11.5 19.9 12.0 9.4 P/Cash EPS (x) 7.3 10.2 7.4 10.2 7.4 6.2 P/BV (x) 1.6 2.8 2.4 2.2 2.0 1.7 EV/EBITDA (x) 15.8 10.3 7.6 10.9 7.5 6.1 EV/Revenue (x) 0.3 0.3 0.2 0.2 0.3 0.3 OCF/EV (%) (2.5) 8.2 13.5 28.5 13.0 13.5 FCFF /EV (%) (6.9) 2.9 5.0 16.4 0.9 2.3 FCFE/M CAP (%) (2.6) 5.0 (3.9) 1.0 (0.7) 0.9 Dividend Yield (%) 1.7 1.7 2.6 1.5 2.5 3.2


Page | 20


Hindustan Petroleum Corporation BUY

Proxy to the diesel margin expansion Having the highest marketing to refining ratio of 2x (31 vs. 15.5 mnT) amongst OMCs make HPCL the biggest beneficiary of the margin expansion in diesel. The marketing segment contributed ~82% to HPCL’s gross profit, of which diesel accounted for ~52% of marketing volumes.

Diesel was a controlled product till Oct-14. Despite the increase in marketing costs, diesel margins were kept fixed at Rs 1.4/L (vs. Rs 2+/L for petrol) for over five years. Strong economic outlook, lower inflation and muted retail prices today provide room for an increase in diesel margins. We remain cautious in our margins/volume assumptions due to the entry of efficient private players. Our base case assumes no margin expansion in FY15 and 10% p.a. FY16 onwards. HPCL’s auto fuels volume growth will be ~2% vs. ~5.4% for the industry.

We expect HPCL’s gross UR to reduce to ~Rs 90bn in FY16/17 from Rs 325bn in FY14. Consequently, all associated business parameters such as net UR/total debt/interest cost are expected to fall from Rs 4.8/ 319/13.3 bn in FY14 to Rs 1.4/204/6.4 bn by FY17.

Higher EBITDA and lower interest cost will boost HPCL’s RoE/RoCE to 17/7% in FY17 vs. 12/4% in FY14. Strong growth, improving ratios and healthy dividend yield (4-5%) commands a BUY on HPCL. Our SOTP target is Rs 740 (~5.1x FY17E EV/EBITDA for standalone biz and Rs 149/sh from investments).

Boost from the diesel decontrol : Diesel accounts for ~52% of HPCL’s marketing volumes, with the marketing segment contributing ~82% to gross profit. Every 10% (Rs 0.14/L) increase in diesel margins will add an EPS of ~Rs 5.4/sh (FY14 EPS was Rs 52.4/sh).

Benefits from lower under recovery : HPCL’s gross UR will reduce from Rs 325bn in FY14 to ~Rs 90bn in FY16/17. This will have multiple benefits (1) net UR will reduce from Rs 4.8bn to Rs 1.4bn. This will add an EPS of Rs 6.9/sh (2) Total debt/interest cost will reduce from Rs 319/13.3 bn in FY14 to Rs 204/6.4 bn by FY17. Interest savings will add an EPS of Rs 13.7/sh.

Valuation : Excluding the value of investments, HPCL is trading at 0.7x/4.3x/4.1x FY17E BV/EPS/EV-EBITDA.

Risks : (1) Sharp rise in crudes prices (2) Sharp depreciation in INR vs. USD (3) Higher UR sharing (4) Above expected aggression by private players to capture retail market share (5) Huge capex in refining.

FINANCIAL SUMMARY (Standalone) (Rs bn) FY13 FY14 FY15E FY16E FY17E Net Sales 2,067.22 2,232.71 1,904.27 1,767.66 1,813.19 EBITDA 36.55 52.38 45.49 54.31 67.12 PAT 8.25 17.75 17.84 23.48 31.21 EPS (Rs) 24.4 52.4 52.7 69.3 92.2 P/E (x) 23.3 10.9 10.8 8.2 6.2 P/BV (x) 1.4 1.3 1.2 1.1 1.0 RoE (%) 6.1 12.4 11.4 13.9 16.7 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS



Sensex 26,909

KEY STOCK DATA

Bloomberg/Reuters HPCL IN/HPCL.BO

No. of Shares (mn) 339

MCap (Rs bn) / ($ mn) 193/3,045

6m avg traded value (Rs mn) 1,085



3M 6M 12M

Absolute (%) 17.2 39.2 156.5

Relative (%) 14.8 36.1 126.5


Promoters 51.11


FIIs 14.10

Public & Others 14.77 Source : BSE Satish Mishra [email protected] +91-22-6171-7334


HPCL : COMPANY UPDATE


The past…

HPCL’s gross oil under recovery increased to ~Rs 330bn/year during FY12-14. Despite subsidy sharing from national oil upstream players (ONGC and OIL), government was required to bare ~60% (~Rs 195bn per year) of the burden.

Higher UR sharing by the government despite weaker financial health led to a delay in subsidy payments. Consequently, ~47% of total government share for FY14 was unpaid by the year end.


The future…

HPCL’s gross oil under recovery will decline to ~Rs 90bn/year FY16 onwards. Government sharing will reduce to one-fourth to ~Rs 40bn/year.

Lower government sharing will lead to lower receivables and timely payments. Consequently HPCL’s total debt will reduce by ~35% to Rs 200bn.

Hence, total interest cost will reduce by ~50%. Interest reduction alone will add ~Rs 14/share (~27% of FY14 EPS).





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300

350

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Total Debt Interest Cost RHS

Rs bn Rs bn

Page | 22


Biggest beneficiary of the diesel decontrol

Amongst all the OMCs, contribution from the marketing segment is largest for HPCL. Gross profit from the marketing division for HPCL is ~82%.

HPCL sold 31 mnT of petroleum products in FY14. Diesel contributed 52% (16 mnT) to the products portfolio. Gross margins for diesel were kept constant at Rs 1.4/L for over five years.

In the case of petrol, we saw that OMCs increased their margins by 20-30% post the decontrol in 2012. Diesel has been decontrolled effective Oct-14, and thus we expect margins on diesel to improve sequentially.

Current margins on diesel are Rs 1.4/L vs. Rs 2+/L on petrol. Though we have built-in the expansion in diesel margins, we remain cautious due to the entry of efficient private players. Our base case assumes no margin expansion in FY15 and 10% p.a. FY16 onwards. We believe it will take more than 5 years for diesel to match the margins on petrol.

Every Rs 0.14/L (10%) increase in diesel margins translates into an increase in HPCL FY14 earnings of 10.1%.

FY17 EPS sensitivity with diesel’s gross margin Diesel Margin (Rs/l) 1.4 1.5 1.7 1.9 2.0 EPS FY17 (Rs/sh) 80.6 86.1 92.2 98.8 106.2 Bear case : No increase in diesel’s margin Base case : no change in FY15 and 10% p.a. increase in FY16/17 Bull case : Margins reaching Rs 2/l by FY17



Rising marketing and diesel margins


14 23

13 9 14 9 11 12

81 71

82 86 81 86 84 83

5 6 5 5 5 6 6 5

0%

20%

40%

60%

80%

100%

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Refining Marketing Pipeline

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

2,500

3,000

3,500

4,000

4,500

5,000

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Marketing Margin (Rs/t) Diesel Margins (Rs/l) RHS

Rs /t Rs /l

Page | 23



losses. However, we expect profitability to improve in FY16/17 led by higher marketing margins and lower debt.



Expansion in return ratios We expect return ratios to remain muted in FY15 and to

improve sequentially. We expect RoE/RoIC to improve to 17/7% by FY17. Assuming a ~35% payout ratio, the stock will give a dividend yield of ~5% on FY17.

Rising returns


FY16E EPS Sensitivity Diesel Margin (Rs/KL) 1,400 1,470 1,540 1,610 1,680

GRM

($/b

bl) 1.5 49.9 52.6 55.3 58.1 60.8

2.0 56.9 59.6 62.3 65.1 67.8 2.5 63.9 66.6 69.3 72.1 74.8 3.0 70.9 73.6 76.3 79.1 81.8 3.5 77.9 80.6 83.3 86.1 88.8


60 70 80 90 100

INR-

USD

59 69.1 68.4 67.6 66.6 65.5 61 70.1 69.4 68.5 67.4 66.2 63 71.1 70.3 69.3 68.2 66.9 65 72.1 71.2 70.2 69.0 67.5 67 73.0 72.1 71.0 69.7 68.2


GRM

($/b

bl) 2.0 66.6 72.1 78.2 84.8 92.2

2.5 73.6 79.1 85.2 91.8 99.2 3.0 80.6 86.1 92.2 98.8 106.2 3.5 87.6 93.1 99.1 105.8 113.2 4.0 94.5 100.1 106.1 112.8 120.2


60 70 80 90 100

INR-

USD

59 91.5 90.8 90.0 89.0 87.9 61 92.7 92.0 91.1 90.0 88.8 63 93.9 93.1 92.2 91.0 89.6 65 95.1 94.3 93.2 92.0 90.5 67 96.3 95.4 94.2 92.9 91.4

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

-10 20 30 40 50 60 70 80

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E


Rs bn

-2 4 6 8

10 12 14 16 18

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E


%

Page | 24


ASSUMPTIONS FY12 FY13 FY14 FY15E FY16E FY17E FY18E

Refining Business Throughput (mnT) 16.2 15.8 15.5 15.5 15.5 15.5 15.5 GRM (US$/bbl) 2.9 2.1 3.4 2.0 2.5 3.0 3.3 Marketing Business Total Sales (mnT) 29.5 30.3 31.0 31.7 32.5 33.3 34.2 YoY Gr (%) 9.1 2.8 2.1 2.5 2.5 2.5 2.5 Diesel Volume (mn T) 14.2 15.5 16.0 16.1 16.5 16.7 16.9 Diesel Volume Gr (%) 15.3 8.7 3.3 1.0 2.5 1.1 1.1 Petrol Volume Gr (%) 7.5 5.2 8.6 5.0 4.0 1.3 1.3 Diesel's Margin (Rs/l) 1.4 1.4 1.4 1.4 1.5 1.7 1.9 Macro INR-US$ 47.9 54.5 60.5 61.3 63.0 63.0 63.0 Crude Price (US$/bbl) 114.5 110.0 107.8 90.5 80.0 80.0 80.0 Total Sector UR (Rs bn) 1,385 1,610 1,399 627 397 389 377 BPCL gross UR (Rs bn) 304 362 325 146 92 90 88 BPCL net UR (Rs bn) 0.1 2.1 4.8 2.2 1.4 1.4 1.3 Source : Company, HDFC sec Inst Research VALUATION (Based on FY17) Business EBIDTA (Rs bn) Multiple Value (Rs bn) Value (Rs/sh) Valuation basis Standalone Refining & Marketing 67.12 5.1# 344 1015 EV/EBIDTA on FY17E Standalone net Debt 144 424 FY17E Standalone Equity Value 200 591 Investments Traded investments 0.65 20 38 35% discount to CMP Non traded investments 0.80 47 111 20% discount to BV Investments Value 149 Value per share 740 Source : Company, HDFC sec Inst Research # Refining 2.5x, Marketing 5.0x, Pipelines 8.0x

Page | 25


STANDALONE INCOME STATEMENT (Rs bn) FY12 FY13 FY14 FY15E FY16E FY17E Revenues 1,783.36 2,067.22 2,232.71 1,904.27 1,767.66 1,813.19 Growth (%) 33.6 15.9 8.0 (14.7) (7.2) 2.6 Material Expenses 1,654.90 1,921.56 2,065.26 1,745.13 1,597.26 1,627.43 Employee Expenses 15.83 25.26 20.30 21.72 23.24 24.87 Other Operating Exps 71.32 83.86 94.77 91.93 92.85 93.78 EBITDA 41.31 36.55 52.38 45.49 54.31 67.12 EBIDTA Margin (%) 2.3 1.8 2.3 2.4 3.1 3.7 Growth (%) 24.9 (11.5) 43.3 (13.2) 19.4 23.6 Other Income 10.26 11.02 9.74 9.92 10.11 10.30 Depreciation 17.13 19.84 22.02 19.92 21.81 23.70 EBIT 34.44 27.74 40.10 35.49 42.60 53.71 Interest 22.24 14.13 13.36 8.45 7.03 6.43 Exceptional items 0.00 (1.13) 0.58 - - - PBT 12.20 12.48 27.32 27.03 35.57 47.28 Tax 3.08 5.70 8.82 9.19 12.10 16.08 RPAT 9.12 6.78 18.51 17.84 23.48 31.21 APAT 9.12 8.25 17.75 17.84 23.48 31.21 Growth (%) (33.8) (9.5) 115.0 0.5 31.6 32.9 AEPS (Rs/sh) 26.9 24.4 52.4 52.7 69.3 92.2


STANDALONE BALANCE SHEET (Rs bn) FY12 FY13 FY14 FY15E FY16E FY17E SOURCES OF FUNDS Share Capital 3.39 3.39 3.39 3.39 3.39 3.39 Reserves 127.84 133.87 146.73 158.20 173.28 193.31 Total Shareholders Funds 131.23 137.26 150.12 161.59 176.67 196.70 Long Term Debt 62.91 89.47 155.55 150.55 140.55 130.55 Short Term Debt 211.88 235.11 163.75 93.75 83.75 73.75 Total Debt 274.79 324.58 319.30 244.30 224.30 204.30 Deferred Taxes 30.85 35.98 39.08 39.08 39.08 39.08 Other LT Liabilities 54.71 62.11 72.08 82.17 93.67 106.79 LT Provisions 4.37 4.99 5.88 5.88 5.88 5.88 TOTAL SOURCES OF FUNDS 495.95 564.93 586.46 533.01 539.60 552.75 APPLICATION OF FUNDS Net Block 208.50 225.49 259.12 281.20 301.39 319.69 CWIP 44.44 51.73 45.86 43.86 41.86 39.86 LT Investments 74.83 82.66 57.36 57.36 57.36 57.36 LT Loans & Advances 14.99 19.38 14.61 14.61 14.61 14.61 Other non current assets 0.67 0.89 1.46 1.46 1.46 1.46 Inventories 194.55 164.39 187.75 156.52 145.29 149.03 Debtors 35.65 49.35 54.66 46.95 43.59 44.71 Cash & Equivalents 31.13 25.09 51.59 52.39 53.77 46.42 ST Loans & Advances 101.51 140.70 100.08 46.88 42.12 43.58 Other Current Assets 4.81 2.79 3.29 3.29 3.29 3.29 Total Current Assets 367.65 382.31 397.37 306.02 288.06 287.03 Creditors 125.61 110.72 106.51 88.69 82.33 84.45 Other Current Liabilities 74.07 68.80 65.39 65.39 65.39 65.39 Provisions 15.47 18.01 17.42 17.42 17.42 17.42 Total Current Liabilities 215.15 197.52 189.32 171.50 165.14 167.26 Net Current Assets 152.51 184.79 208.05 134.52 122.92 119.77 TOTAL APPLICATION OF FUNDS 495.95 564.93 586.46 533.01 539.60 552.75


Page | 26


STANDALONE CASH FLOW (Rs bn) FY12 FY13 FY14 FY15E FY16E FY17E Reported PAT 9.11 9.05 17.34 17.84 23.48 31.21 Non-operating & EO items 6.87 8.15 6.14 6.65 6.77 6.90 PAT from Operations 2.25 0.90 11.20 11.19 16.71 24.31 Depreciation 17.13 19.84 22.02 19.92 21.81 23.70 Interest expenses 22.24 14.13 13.36 8.45 7.03 6.43 Working Capital Change (24.30) (31.40) 20.11 84.41 24.49 8.92 OPERATING CASH FLOW ( a ) 17.31 3.46 66.69 123.98 70.04 63.35 Capex (45.27) (42.49) (48.50) (40.00) (40.00) (40.00) Free cash flow (FCF) (27.96) (39.02) 18.19 83.98 30.04 23.35 Investments (1.59) (7.83) 25.30 - - - Other Income 6.87 7.39 6.53 6.65 6.77 6.90 INVESTING CASH FLOW ( b ) (39.99) (42.93) (16.67) (33.35) (33.23) (33.10) Debt Issuance 38.50 49.79 (5.28) (75.00) (20.00) (20.00) Interest expenses (22.24) (14.13) (13.36) (8.45) (7.03) (6.43) FCFE (11.70) (3.36) (0.46) 0.53 3.01 (3.07) Share capital Issuance - - - - - - Dividend (3.35) (3.37) (6.14) (6.38) (8.40) (11.17) Others (0.00) 0.36 1.66 0.00 - - FINANCING CASH FLOW ( c ) 12.91 32.65 (23.13) (89.83) (35.43) (37.60) NET CASH FLOW (a+b+c) (9.77) (6.81) 26.89 0.80 1.38 (7.35) EO Items (0.00) 0.76 (0.39) - - - Closing Cash & Equivalents 31.13 25.09 51.59 52.39 53.77 46.42



PROFITABILITY % EBITDA margin 2.3 1.8 2.3 2.4 3.1 3.7 EBIT margin 1.9 1.3 1.8 1.9 2.4 3.0 APAT margin 0.5 0.4 0.8 0.9 1.3 1.7 RoE 7.1 6.1 12.4 11.4 13.9 16.7 Core RoCE 4.8 2.4 4.3 3.7 5.0 6.5 RoCE 5.5 3.1 4.6 4.2 5.2 6.5 EFFICIENCY Tax rate % 25.2 41.9 33.0 34.0 34.0 34.0 Total Asset turnover (x) 3.8 3.9 3.9 3.4 3.3 3.3 Inventory (days) 40 29 31 30 30 30 Debtor (days) 7 9 9 9 9 9 Payables (days) 26 20 17 17 17 17 Cash conversion cycle (days) 21 18 22 22 22 22 Net Debt/EBITDA (x) 3.8 4.7 3.8 3.8 2.9 2.1 Net D/E 1.2 1.3 1.3 1.1 0.9 0.7 Interest coverage 1.5 2.0 3.0 4.2 6.1 8.4 PER SHARE DATA EPS (Rs) 26.9 24.4 52.4 52.7 69.3 92.2 CEPS (Rs) 77.5 82.9 117.4 111.5 133.8 162.1 DPS (Rs) 8.5 8.5 15.5 16.1 21.2 28.2 BV (Rs) 387.5 405.4 443.3 477.2 521.7 580.9 VALUATION P/E (x) 21.1 23.3 10.9 10.8 8.2 6.2 P/Cash EPS (x) 7.3 6.9 4.8 5.1 4.3 3.5 P/BV (x) 1.5 1.4 1.3 1.2 1.1 1.0 EV/EBITDA (x) 8.5 10.0 7.4 8.1 6.5 5.0 EV/Revenue (x) 0.2 0.2 0.2 0.2 0.2 0.2 OCF/EV (%) 4.9 0.9 17.1 33.8 20.0 18.8 FCFF/EV (%) (8.0) (10.7) 4.7 22.9 8.6 6.9 FCFE/M CAP (%) (6.1) (1.7) (0.2) 0.3 1.6 (1.6) Dividend Yield (%) 1.5 1.5 2.7 2.8 3.7 5.0


Page | 27


Indian Oil Corporation BUY

Diversified and sturdy IOC has the most diversified business portfolio amongst OMCs. At one end it has an annuity/non-volatile biz like pipelines (contributes ~25% to gross profits) and on the other end, ~50% comes from the currently buzzing marketing segment. IOC has marketing to refining ratio of 1.5x (79.7 vs 53.1 mnT) and diesel accounts for ~46% of marketing volumes.

Diesel was a controlled product till Oct-14. Despite the increase in marketing costs, diesel margins were kept fixed at Rs 1.4/L (vs. Rs 2+/L for petrol). Strong economic outlook, lower inflation and muted retail prices today provide room for an increase in diesel margins. We remain cautious in our margins/volume assumptions due to the entry of efficient private players. Our base case builds in no margin expansion in FY15 and 10% p.a. FY16 onwards. IOC’s auto fuels volume growth will be ~2% vs. ~5.4% for the sector.

We expect IOC’s gross UR to reduce to ~Rs 200bn in FY16/17 from Rs 729bn in FY14. Consequently, all associated business parameters - net UR/total debt/interest cost are expected to fall from Rs 11/ 806/51 bn in FY14 to Rs 3/441/33 bn by FY17.

Higher EBITDA and lower debt will boost IOC’s RoE/RoCE to 13/9% in FY17 vs. 9/6% in FY14. Strong growth, improving ratios, healthy dividend yield (3-4%) and diversified earnings command a BUY on IOC. Our SOTP target is Rs 425 (~5.1x FY17E EV/EBITDA for standalone biz and Rs 120/sh from investments).

Boost from the diesel decontrol : Diesel accounts for ~46% of IOC’s marketing volumes with the marketing segment contributing ~50% to gross profit. Every 10% (Rs 0.14/L) increase in diesel margins will add an EPS of ~Rs 1.7/sh (FY14 EPS was Rs 24.1/sh).

Benefits from lower under recovery : IOC’s gross UR will reduce from Rs 729bn in FY14 to ~Rs 200bn in FY16/17. This will have multiple benefits (1) net UR will reduce from Rs 10.8bn to Rs 3.0bn. This will add an EPS of Rs 2.1/sh (2) Total debt/interest cost will reduce from Rs 806/50.8 bn in FY14 to Rs 441/33.0 bn by FY17. Interest savings will add an EPS of Rs 4.9/sh.

Valuation : Excluding the value of investments, IOC is trading at 0.6x/5.2x/3.2x FY17E BV/EPS/EV-EBITDA.

Risk : (1) Sharp volatility in crude prices/exchange rate (2) Higher UR sharing (3) Above expected aggression by the private players to capture retail market share (4) Delay in commissioning of the Paradeep refinery.

FINANCIAL SUMMARY (Standalone) (Rs bn) FY13 FY14 FY15E FY16E FY17E Net Sales 4,470.96 4,732.10 4,127.32 3,769.59 3,786.55 EBITDA 137.37 156.06 116.11 161.75 210.54 APAT 50.05 58.49 41.38 70.30 98.12 EPS (Rs) 20.6 24.1 17.0 29.0 40.4 P/E (x) 16.3 13.9 19.7 11.6 8.3 P/BV (x) 1.3 1.2 1.2 1.1 1.0 RoE (%) 8.4 9.2 6.1 9.9 12.8 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS



Sensex 26,909

KEY STOCK DATA

Bloomberg/Reuters IOCL IN/IOC.BO

No. of Shares (mn) 2,428

MCap (Rs bn) / ($ mn) 814/12,874

6m avg traded value (Rs mn) 465



3M 6M 12M

Absolute (%) (6.2) (2.0) 67.8

Relative (%) (8.6) (5.1) 37.8


Promoters 68.57


FIIs 2.61

Public & Others 24.40 Source : BSE



IOC : COMPANY UPDATE


The past…

IOC’s gross oil under recovery increased to ~Rs 750bn/year during FY12-14. Despite subsidy sharing from the national oil upstream players (ONGC and OIL), the government was required to bare ~60% (~Rs 450bn per year) of the burden.

Higher UR sharing by the government despite the weaker financial health led to a delay in subsidy payments. Consequently, ~55% of total government share for FY14 was unpaid by the year end.


The future…

IOC’s gross oil under recovery will decline to ~Rs 200bn/year FY16 onwards. Government sharing will reduce to one-fourth to ~Rs 100bn/year.

Lower government sharing will lead to lower receivables. IOC’s total debt (excluding Paradeep Refinery expansion debt of ~Rs 150bn) will reduce by ~45% to Rs 450bn.

Consequently, total interest cost (excluding Paradeep Refineries) will reduce by ~50%. Part benefits of lower working capital debt will be negated by the capitalisation of the Paradeep refinery in FY16.





-

20

40

60

80

100

120

-

200

400

600

800

1,000

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

IOC Gross UR Govt share

Govt Receivables Receivables/Govt share (%)

Rs bn %

-

10

20

30

40

50

60

70

-

200

400

600

800

1,000

1,200

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Interest - Current Biz (RHS) Interest - Paradeep (RHS)Total Debt (ex Paradeep) Paradeep Debt

Rs bn Rs bn

Page | 29


Gaining strength in the refining business Refining is a volatile business and the situation ahead

looks grim given the softening crude prices and weaker China/Europe outlook. Commissioning of the Paradeep Refinery in FY16 will bring sturdiness to this segment for IOC. It’s a 15 mnT p.a. refinery with a

nelson complexity index of 13. Full benefits from this refinery will come in FY18. Our throughput and GRM assumptions for the new refinery for FY16/17 are 4.5/12 mnT and USD 5/7.5 per bbl.

Refineries throughput and GRM trend


-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Throughput - Existing Throughput - Paradeep GRM - Existing (RHS) GRM - Paradeep (RHS) Cumulative GRM (RHS)

mn T $/bbl

Page | 30


Diversified business portfolio IOC’s 75-80% of gross profit comes from stable

businesses like pipelines, marketing and petchem.



Expansion in the marketing biz profitability IOC will benefit from the decontrolled scenario as

~60% of its profits come from marketing.

Marketing segment and diesel’s margins



losses. However we expect profitability to improve in FY16/17 led by higher marketing margins and lower debt.



Expansion in return ratios We expect return ratios to bottom out in FY15 and to

improve sequentially. We expect RoE/RoCE to improve to 13/9% by FY17. Assuming a ~35% payout ratio, the stock will give a dividend yield of 3.6%.

Rising returns


24 30 16 16 20 10 17 23

65 58 68 63 61 68 63 59

10 12 12 14 13 14 13 12 - 1 4 7 7 8 7 7

0%

20%

40%

60%

80%

100%

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Refining Marketing Pipeline Chemical

1.0

1.2

1.4

1.6

1.8

3,000 3,200 3,400 3,600 3,800 4,000 4,200 4,400

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Diesel Margins RS Marketing Margins

Rs/t Rs/l

-

0.2

0.4

0.6

0.8

1.0

1.2

-

50

100

150

200

250

FY10

FY11

FY12

FY13

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FY16

E

FY17

E


Rs bn

-

5

10

15

20

25

FY10

FY11

FY12

FY13

FY14

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E

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E


%

Page | 31



GRM

($/b

bl) 1.5 19.7 20.6 21.5 22.5 23.4

2.0 23.4 24.3 25.2 26.2 27.1 2.5 27.1 28.0 29.0 29.9 30.8 3.0 30.8 31.7 32.7 33.6 34.5 3.5 34.5 35.4 36.4 37.3 38.2


INR-

USD

59 27.2 27.0 26.7 26.4 26.0 61 28.4 28.1 27.9 27.5 27.1 63 29.5 29.3 29.0 28.6 28.1 65 30.7 30.4 30.1 29.6 29.2 67 31.8 31.5 31.1 30.7 30.2


GRM

($/b

bl) 1.5 28.9 30.8 32.9 35.0 37.1

2.0 32.7 34.6 36.7 38.8 40.8 2.5 36.4 38.3 40.4 42.5 44.6 3.0 40.2 42.1 44.2 46.3 48.3 3.5 43.9 45.8 47.9 50.0 52.0


INR-

USD

59 37.9 37.6 37.4 37.0 36.6 61 39.4 39.2 38.9 38.5 38.1 63 41.0 40.7 40.4 40.0 39.6 65 42.6 42.3 41.9 41.5 41.0 67 44.1 43.8 43.5 43.0 42.5

ASSUMPTIONS FY12 FY13 FY14 FY15E FY16E FY17E FY18E

Refining Throughput (mnT) 55.6 54.6 53.1 54.7 55.3 55.8 55.8 GRM (USD/bbl) 3.6 3.2 4.2 2.0 3.3 4.0 4.5 Paradeep Throughput (mnT) 4.5 12.0 15.0 Paradeep GRM (USD/bbl) 5.0 7.5 8.0 Marketing Volumes (mnT) 75.7 76.5 79.7 81.7 83.7 85.8 87.9 YoY Gr (%) 3.8 1.0 4.1 2.5 2.5 2.5 2.5 Diesel Volume Gr (%) 7.9 4.4 3.5 1.0 2.5 1.1 1.1 Petrol Volume Gr (%) 5.2 4.1 3.5 5.0 4.0 1.3 1.3 Diesel's Margin (Rs/l) 1.4 1.4 1.4 1.4 1.5 1.7 1.9 Petchem Volumes (mn T) 1.55 2.08 2.12 2.16 2.20 2.25 2.29 Pipeline Volumes (mnT) 75.0 75.6 73.1 74.2 75.3 77.5 78.7 Revenues (Rs/kg/km) 62.6 76.9 79.5 81.1 82.7 84.4 86.1 Macro Crude Price (USD/bbl) 114.5 110.0 107.8 90.5 80.0 80.0 80.0 USD - INR 47.9 54.5 60.5 61.3 63.0 63.0 63.0 Total sector's UR 1,385.41 1,610.29 1,398.69 627.25 397.32 388.53 377.25 IOC's UR 754.68 857.94 729.38 327.09 207.19 202.61 196.73 Net UR 3.64 5.49 10.83 4.91 3.11 3.04 2.95 Source : Company, HDFC sec Inst Research

Page | 32


VALUATION (Based on FY17) Business EBITDA (Rs bn) Multiple Value (Rs bn) Value (Rs/sh)* Valuation basis Standalone Refining & Marketing 210.54 5.1# 1,066 450 EV/EBIDTA on FY17E Standalone net Debt 344 FY17E Standalone Equity Value 722 305 Investments Traded investments 0.65 283 78 35% discount to CMP Non traded investments 0.80 125 42 20% discount to BV Investments Value 120 Value per share 425 Source : Company, HDFC sec Inst Research, * Valuation is based on 2.37 bn shares (net of treasury shares) # Refining 2.5x, Marketing 5.0x, Pipelines 8.0x, petchem 4.0x

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STANDALONE INCOME STATEMENT (Rs bn) FY12 FY13 FY14 FY15E FY16E FY17E Revenues 3,984.78 4,470.96 4,732.10 4,127.32 3,769.59 3,786.55 Growth (%) 21.8 12.2 5.8 (12.8) (8.7) 0.4 Material Expenses 3,542.22 4,027.06 4,220.96 3,649.94 3,222.26 3,160.08 Employee Expenses 49.77 72.71 66.19 69.50 72.97 76.62 Other Operating Exps 208.35 233.82 288.89 291.78 312.60 339.32 EBITDA 184.44 137.37 156.06 116.11 161.75 210.54 EBIDTA Margin (%) 4.6 3.1 3.3 2.8 4.3 5.6 Growth (%) 57.3 (25.5) 13.6 (25.6) 39.3 30.2 Other Income 31.98 35.15 34.17 32.17 31.56 30.52 Depreciation 48.68 52.01 57.60 51.43 60.93 68.92 EBIT 167.74 120.51 132.63 96.85 132.38 172.14 Interest 55.91 64.09 50.84 38.14 32.67 32.97 Exceptional items (74.29) 0.06 17.47 - - - PBT 37.54 56.48 99.26 58.70 99.71 139.17 Tax (2.00) 6.43 29.06 17.32 29.41 41.06 RPAT 39.55 50.05 70.19 41.38 70.30 98.12 APAT 91.19 50.05 58.49 41.38 70.30 98.12 Growth (%) 20.9 (45.1) 16.9 (29.2) 69.9 39.6 AEPS 37.6 20.6 24.1 17.0 29.0 40.4


STANDALONE BALANCE SHEET (Rs bn) FY12 FY13 FY14 FY15E FY16E FY17E SOURCES OF FUNDS Share Capital 24.28 24.28 24.28 24.28 24.28 24.28 Reserves 554.49 586.96 635.64 662.54 708.12 771.87 Total Shareholders Funds 578.77 611.24 659.92 686.82 732.40 796.15 Long Term Debt 168.27 214.14 316.84 311.84 306.84 301.84 Short Term Debt 534.97 569.11 489.16 269.16 194.16 139.16 Total Debt 703.24 783.25 805.99 580.99 500.99 440.99 Deferred Taxes 52.42 55.13 56.16 56.16 56.16 56.16 Other LT Liabilities 3.33 114.35 134.12 134.12 134.12 134.12 LT Provisions 2.58 3.75 3.90 3.90 3.90 3.90 TOTAL SOURCES OF FUNDS 1,340.34 1,567.73 1,660.09 1,461.99 1,427.57 1,431.32 APPLICATION OF FUNDS Net Block 601.38 606.33 629.49 643.06 907.13 868.20 CWIP 134.15 262.30 338.79 338.79 78.79 113.79 LT Investments 49.18 50.33 163.11 178.11 193.11 208.11 LT Loans & Advances 96.44 48.76 46.26 46.26 46.26 46.26 Other non current assets 0.17 0.14 0.70 0.70 0.70 0.70 Inventories 568.29 593.14 646.97 564.29 515.38 517.70 Debtors 97.25 112.57 110.23 96.14 87.81 88.21 Cash & Equivalents 140.68 141.42 98.91 89.08 76.53 64.50 ST Loans & Advances 325.25 397.57 415.74 250.05 239.38 242.64 Other Current Assets 85.80 67.63 73.92 73.92 73.92 73.92 Total Current Assets 1,217.28 1,312.34 1,345.78 1,073.48 993.01 986.96 Creditors 303.45 296.68 356.97 311.35 284.36 285.64 Other Current Liabilities 305.90 199.14 243.19 243.19 243.19 243.19 Provisions 148.90 216.65 263.88 263.88 263.88 263.88 Total Current Liabilities 758.26 712.47 864.05 818.42 791.44 792.72 Net Current Assets 459.01 599.87 481.73 255.06 201.57 194.24 TOTAL APPLICATION OF FUNDS 1,340.34 1,567.73 1,660.09 1,461.99 1,427.57 1,431.32


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STANDALONE CASH FLOW (Rs bn) FY12 FY13 FY14 FY15E FY16E FY17E Reported PAT 39.55 50.05 70.19 41.38 70.30 98.12 Non-operating & EO items (28.35) 23.59 34.60 21.55 21.15 20.45 PAT from Operations 67.89 26.46 35.59 19.83 49.15 77.67 Depreciation 48.68 52.01 57.60 51.43 60.93 68.92 Interest expenses 55.91 64.09 50.84 38.14 32.67 32.97 Working Capital Change (183.27) 22.49 98.51 216.84 40.94 (4.70) OPERATING CASH FLOW ( a ) (10.79) 165.05 242.55 326.24 183.69 174.86 Capex (109.53) (185.11) (157.25) (65.00) (65.00) (65.00) Free cash flow (FCF) (120.32) (20.05) 85.30 261.24 118.69 109.86 Investments (2.15) (1.15) (112.79) (15.00) (15.00) (15.00) Other Income 21.43 23.55 22.90 21.55 21.15 20.45 INVESTING CASH FLOW ( b ) (90.25) (162.70) (247.14) (58.45) (58.85) (59.55) Debt Issuance 200.15 80.01 22.74 (225.00) (80.00) (60.00) Interest expenses (55.91) (64.09) (50.84) (38.14) (32.67) (32.97) FCFE 23.92 (4.13) 57.20 (1.90) 6.02 16.89 Share capital Issuance - - - - - - Dividend (14.08) (17.61) (24.71) (14.49) (24.71) (34.37) Others (0.02) 0.04 3.20 (0.00) 0.00 0.00 FINANCING CASH FLOW ( c ) 130.14 (1.65) (49.62) (277.63) (137.38) (127.34) NET CASH FLOW (a+b+c) 29.10 0.70 (54.21) (9.84) (12.55) (12.03) EO Items (49.77) 0.04 11.70 - - - Closing Cash & Equivalents 140.68 141.42 98.91 89.08 76.53 64.50



PROFITABILITY % EBITDA margin 4.6 3.1 3.3 2.8 4.3 5.6 EBIT margin 4.2 2.7 2.8 2.3 3.5 4.5 APAT margin 2.3 1.1 1.2 1.0 1.9 2.6 RoE 16.1 8.4 9.2 6.1 9.9 12.8 Core RoCE 11.2 6.0 5.0 3.5 6.0 8.6 RoCE 12.2 7.3 5.9 4.4 6.5 8.5 EFFICIENCY Tax rate % (5.3) 11.4 29.3 29.5 29.5 29.5 Total Asset turnover (x) 3.4 3.3 3.3 3.0 3.0 3.1 Inventory (days) 52 48 50 50 50 50 Debtor (days) 9 9 9 9 9 9 Payables (days) 28 24 28 28 28 28 Cash conversion cycle (days) 33 33 31 31 31 31 Net Debt/EBITDA (x) 3.1 4.7 4.5 4.2 2.6 1.8 Net D/E 1.0 1.1 1.1 0.7 0.6 0.5 Interest coverage 3.0 1.9 2.6 2.5 4.1 5.2 PER SHARE DATA EPS (Rs) 37.6 20.6 24.1 17.0 29.0 40.4 CEPS (Rs) 57.6 42.0 47.8 38.2 54.1 68.8 DPS (Rs) 5.0 6.2 8.7 5.1 8.7 12.1 BV (Rs) 238.4 251.8 271.8 282.9 301.7 327.9 VALUATION P/E (x) 8.9 16.3 13.9 19.7 11.6 8.3 P/Cash EPS (x) 5.8 8.0 7.0 8.8 6.2 4.9 P/BV (x) 1.4 1.3 1.2 1.2 1.1 1.0 EV/EBITDA (x) 7.2 10.2 8.7 9.7 6.5 4.7 EV/Revenue (x) 0.3 0.3 0.3 0.3 0.3 0.3 OCF/EV (%) (0.8) 11.7 17.9 28.9 17.6 17.8 FCFF/EV (%) (13.3) (6.0) 2.5 19.8 8.2 7.8 FCFE/M CAP (%) 2.9 (0.5) 7.0 (0.2) 0.7 2.1 Dividend Yield (%) 1.5 1.9 2.6 1.5 2.6 3.6


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Disclosure: I, Satish Mishra, MBA, author and the name 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. 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Oil - Downstream - Update - Jan 15

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