HPCL’s core sustainable GRM has increased to $5-6/barrel (vs. $ 3-3.5/barrel over FY10-14) as weak oil prices have reduced fuel losses.
Growth in gross marketing margin is targeted at 6-7%, which will more than offset opex inflation, leading to growth in EBITDA margin. Above guidance will lead to EPSCAGR of ~22% over FY16-18 vs. consensus/our estimates of 5%/14%.
We believe HPCL’s core GRM is sustainable at $ 5-6/ barrel as correction in oil prices (from $ 100/barrel to ~$ 50-60/barrel) over the last 2 years has reduced fuel losses to $ 3.5-4.2/barrel (7% of USD 50/barrel) vs. USD 7/barrel (7% of USD 100/barrel) earlier. Hence we increase our FY18 EPS estimates by ~6% to factor in higher GRM at USD 5.5/bl vs. $ 5/barrel earlier, but maintain marketing volume growth at 3% (vs. 6% guided by management).
We raise our target prices to R530 (R486 earlier) to reflect higher refining EBITDA and higher value of investments (MRPL, Bhatinda). Capital expenditure ex for FY17/18 would be at Rs 50-60 billion each, which will be predominantly funded through internal accruals.