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Research
HPCL - Earnings most exposed to vagaries of subsidies - IIFL
Posted On : 2013-03-17 20:04:59( TIMEZONE : IST )
We note HPCL has the lowest refining to marketing mix among the OMC's. Thereby, its purchases form a relatively higher proportion of the market sales and in turn increase its dependence on staggered subsidy reimbursements from the government. With increasing under-recoveries in FY12-13 (on back of a higher crude price), the debt levels and working capital requirements shot up leading to hefty interest outgoes. This has clearly reflected in the return ratios which have weakened considerably below the long term averages. Notably the estimated RoE for FY13 is seen at ~5% vis-Ã -vis the 14% levels. Going ahead as sector reforms on under recoveries are implemented we expect the return ratio to improve from here on. However, heavy capex plans and continued high interest outgo will mean the improvement would be gradual. HPCL has a target capex of Rs120bn over FY13-15E on new refinery in Rajasthan and capacity expansion at Vizag.
Outlook for GRM is grim
Additional new capacities coming up in Russia, Saudi-Arabia and consistent capacity addition in China amidst weak global demand is going to keep GRM's under check, in our view. Despite the significant volume of closures, net refining capacity globally is estimated to have increased by 1.3mbpd in CY12 and is projected to increase by 1.7mbpd in CY13. Additionally, complete export parity pricing in the domestic market will be a negative for the refiners as it will impact the GRMs by US$1.5-2/bbl. Amidst such outlook we model GRM's of US$3-4/bbl over FY14-15.
With complete price freedom far away... earnings volatility to continue in FY14
The recent government moves on partial de-regulation of diesel and capping of number of subsidized LPG cylinders available to each household will cause marked reduction in gross under recoveries. Nevertheless, complete price freedom on diesel is still far away and comes with its set of political obstacles. Though trading at cheap valuations, we expect the earnings volatility for HPCL to continue in FY14 and do not see strong visibility in business as yet.