1. Hindustan Petroleum Corporation rated ‘Buy’, Jefferies says company on course to beat consolidated earnings

Hindustan Petroleum Corporation rated ‘Buy’, Jefferies says company on course to beat consolidated earnings

However, company is on course for a beat in consolidated earnings for FY17e

By: | Published: February 20, 2017 4:12 AM

diesel

Adjusting for larger than expected inventory gains, HPCL’s earnings missed our estimate in both refining and marketing. The company announced an interim dividend of R22.5/share amounting to over 50% of 9M earnings. We continue to expect a significant beat in consolidated earnings for full year FY17E — our estimate is 26% ahead of consensus. Despite outperformance over last 12 months, valuations remain reasonable at 8x P/E and 6x EV/Ebitda. Maintain Buy.

Miss in Q3, adjusting for large inventory gains: While HPCL’s reported Ebitda was in line with our estimate, this was on account of larger than expected inventory gains in both refining – R5.4 bn or $ 2.3/bbl out of reported GRM of $6.4/bbl—and marketing – R7 bn vs. est. of R3 bn. Adjusted for these, both refining and marketing earnings missed our estimates. Lower interest expense in the quarter was offset by a miss in other income.
Dividend of R22.5/share: HPCL announced an interim dividend of R22.5/share amounting to over 50% of 9MFY17 and 40% of FY17e standalone earnings.

On track to beat consensus estimate in standalone: HPCL’s 9MFY17 standalone net profit is already 90% of full year consensus estimate. As a result we expect consensus earnings to be upgraded even post the disappointment in Q3 — our standalone estimate is 14% ahead of consensus.

ebitda

Expect significant positive surprise in consol earnings: We maintain that HPCL’s full year FY17 consolidated earnings will provide a significant positive surprise due to strong performance by its key JVs: HMEL and MRPL. Our consolidated earnings estimate for FY17e is 26% ahead of consensus.

Updating Three Factor Valuation Framework — Maintain Buy: We update our model to reflect higher refinery throughput, lower non-diesel marketing margin and higher contribution from subsidiaries. We also update and roll forward our Three Factor Valuation Framework to get a fair value of R618.

Valuation: Our SOTP fair value of R618 (prev. R512) implies 9x P/E and 7x EV/Ebitda on FY18/19E earnings.
Key risks: (i) Lower marketing earnings, GRM; (ii) sharp rise in crude price to over $75/bbl; (iii) adverse government action.

Target Investment Thesis: * Gradual improvement in marketing margin of diesel and other unregulated products.
* Crude price stays below $75/bbl
*GRM of 5.5/5.7/5.3 $/bbl in FY17-19e.
*Diesel marketing margin of 1-1.2 R/litre in FY17-19e.
* EPS of 69/66.6/69.2 R/share in FY17-19e.
*Fair value of R618 based on Three Factor Valuation

Upside Scenario
*Crude price remains below $50/bbl.
*Better than expected marketing margins by R0.1/l and refining margins by $1/bbl.

*Better than expected performance by HMEL and MRPL.
*Fair value of R750 based on Three Factor Valuation

Downside Scenario

*Crude price goes up to $80/bbl.
*Lower than expected marketing and refining margins. Lower than expected contribution from HMEL and MRPL.
*Fair value of R450 based on Three Factor Valuation

Company description:

HPCL is a large oil marketing and refining company and is majority owned by the government of India. It has ~25% market share in retailing of petrol and diesel. It has total refining capacity of 14.8 MMT. It is also part of the joint venture HPCL-Mittal Energy Ltd (HMEL) that has commissioned a 9MMT green field refinery in Bathinda in FY13.

 

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