Outperform on HPCL, driven by strong Q1: IDFC Institutional Securities

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Published: August 13, 2015 12:25:36 AM

Reiterate ‘outperform’ on HPCL with a revised 12-month price target of R1,083 a share. We revise our FY16/17e EPS estimates upwards by 17% each to factor...

Reiterate ‘outperform’ on HPCL with a revised 12-month price target of R1,083 a share. We revise our FY16/17e EPS estimates upwards by 17% each to factor in (1) marginally higher refining throughput; (2) higher GRMs; and (3) lower subsidy due to softer crude.

The stock currently trades at a discount of ~20% on P/E and P/Bv basis, respectively, versus BPCL which, we believe, is unjustified even after factoring in the relatively better operational metrics of BPCL. The sharp run up in OMC stocks over the last 12 months has been driven by deregulation of (1) gasoline and diesel; (2) softer crude prices, allowing for incremental marketing margins; and (3) resultant decrease in debt as well as interest costs driving profitability.

Despite 56% outperformance to Sensex and BSE oil & gas index in the last six months, we see further re-rating ahead for HPCL.

We believe that the softness in crude prices is likely to continue for a longer time, helping support marketing margins while the threat of private competition is still some time away.

Historically, HPCL has been most leveraged to movements in subsidy payouts and pricing decisions on the regulated fuels, such as diesel, LPG and kerosene, and the delays in (1) paying the OMCs their share of the subsidy by the government and (2) muted refining margins materially affect operating and financial metrics for HPCL. Therefore the events on fuel pricing in the last year, coupled with improvement in macro turning decidedly in favor of OMCs (reduction in crude prices, deregulation of petrol and diesel) has reflected in the stock performance of the company, which has gone up 1.3x over the last 12 months. We remain bullish on HPCL’s prospects over the next 12 months.

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