Oil - Downstream - Update - Jan 15

SECTOR UPDATE
8 JAN 2015
Oil - Downstream
Achchhe din*
Absolute Stock Returns (%)
1M
3M
1Y
BPCL
(6.4)
(0.9)
99.3
HPCL
0.4
17.2
156.5
(2.3)
(6.2)
67.8
IOC
Valuation (on FY17E Standalone)

Investments
P/E (x) P/BV (x)
(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
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.
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.
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.
OMCs set to benefit
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.
SECTOR PERSPECTIVE
COMPANY#
Satish Mishra
satish.mishra@hdfcsec.com
+91-22-6171-7334
BPCL
HPCL
IOC
Rating
BUY
BUY
BUY
MCap
(Rs bn)
466
193
813
FY14
80.9
52.4
156.1
EBITDA (Rs bn)

FY15E FY16E
49.3
71.5
45.5
54.3
116.1 161.8
FY17E
89.0
67.1
210.5
Source: Company, HDFC sec Inst Research, # all numbers are standalone
* Hindi for the good times
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).
FY14
40.6
17.7
58.5
PAT (Rs bn)

FY15E FY16E
23.4
38.7
17.8
23.5
41.4
70.3
FY17E
49.7
31.2
98.1
FY14
22.5
12.4
9.2
RoE (%)
FY15E FY16E
11.6
17.4
11.4
13.9
6.1
9.9
FY17E
19.8
16.7
12.8
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
DOWNSTREAM OIL: SECTOR UPDATE
Summary
BPCL
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
Benefit
Benefits from
lower oil UR in
FY17 over FY14
Benefits from
diesel marketing
margin expansion
Additional EPS
(Rs/sh)
IOC
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
Benefit
Additional EPS
(Rs/sh)
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
Benefit
Additional EPS
(Rs/sh)
Lower net
under recovery
3.4
Lower net
under recovery
6.9
Lower net
under recovery
2.1
Lower interest
cost
6.9
Lower interest
cost
13.7
Lower interest
cost
4.9
10% rise in diesel mktg margins

leads to a 5.2% jump in FY14 PBT
Business
Target Valuation
(on FY17E)
HPCL
Refining
Marketing
Pipelines
EBITDA
share
29%
64%
6%
EV/EBITDA
multiple
4.0
5.0
8.0

Business
Refining
Marketing
Pipelines
EBITDA
share
9%
82%
10%
EV/EBITDA
multiple
2.5
5.0
8.0

Business
Refining
Marketing
Pipelines
Petchem
EBITDA
share
29%
43%
20%
8%
EV/EBITDA
multiple
3.5
5.0
8.0
4.0
Traded investments @ 35%

discount to CMP

discount to CMP

discount to CMP
Investments value Rs 214/sh
Target Rs 790/sh, BUY
Source: HDFC sec Inst Research
Page | 2
Dec-14
Dec-14
Aug-14
Apr-14
Dec-13
Aug-13
Apr-13
Dec-12
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
P/BV
Aug-14
Apr-07
Aug-07
Dec-14
Aug-14
Apr-14
Dec-13
Aug-13
Apr-13
Dec-12
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
P/BV
Apr-14
P/BV
Dec-13
Aug-13
Apr-13
Dec-12
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
IOC
Apr-07
2.2
Aug-07
0.8
Dec-06
Long Term (P/BV)/RoE = 9.3
Dec-06
Aug-06
1.2
Aug-06
LT avg 1-year fwd RoE = 9.9%
Apr-06
Dec-05
1.6
Apr-06
LT avg 1-year fwd P/BV = 0.9x
Dec-05
Aug-05
HPCL
Aug-05
2.4
Apr-05
Apr-05
Dec-04
Aug-04
Dec-04
Aug-04
Apr-04
2.9
Aug-04
Apr-04
BPCL
Apr-04
DOWNSTREAM OIL : SECTOR UPDATE
BPCL 1-year forward P/BV and RoE

RoE (%)
25.0
2.4
20.0
1.9
15.0
1.4
10.0
0.9
5.0
0.4
-
HPCL 1-year forward P/BV and RoE

RoE (%)
2.0
0.4
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
-
IOC 1-year forward P/BV and RoE
RoE (%)
25.0
1.8
20.0

1.4
15.0

1.0
10.0

0.6
5.0
0.2
-
Page | 3
Recap of the past decade

Increasing energy demand led by robust GDP growth
Indias 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, Indias energy requirement will
grow at 0.84x the GDP growth. This ratio is further set to
increase led by the governments renewed focus on
industrialization.
Indias GDP growth and Energy consumption multiplier
10.0
GDP Gr (%)
Avg GDP Gr (%)
Avg Energy Multiplier (RHS)
1.0
8.0
0.8
6.0
0.6
4.0
0.4
2.0
0.2
CY13
CY12
CY11
CY10
CY09
CY08
CY07
CY06
CY05
CY04
Source: Govt reports, BP, HDFC sec Inst Research
Sensitive Product Gr (%)
Auto Fuel Gr (%)
Avg Sens prod (%)
Avg Auto fuel (%)
12.0
10.0
8.0
6.0
4.0
2.0
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
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%.
Consumption growth of sensitive products in India
FY06
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.
FY05
Source: PPAC, Govt reports, HDFC sec Inst Research
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.
Indias petroleum products consumption increased to
158 mnT in FY14 vs. 108 mnT in FY04. This increase was
despite the fall in oils 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%.
Rising crude demand-supply mismatch

Production (mn T)
Import Share (%)
180
Consumption (mn T)
mn T
79%
78%
77%
76%
75%
74%
73%
72%
71%
70%
69%
68%
160
140
120
100
80
60
40
20
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
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.
Currency and crude price movement

Crude (USD/bbl)
140
INR-USD (RHS)
$/bbl
48
120
55
61
70
60
INR depreciated by 36% from 45 to 61 against the USD

over the same period.
100
To sum up, all the three variables which could have

supported India in the scenario of rising energy demand,
worsened over the period.
80
40
60
30
40
20
46
108
110
50
114
87
47
70
46
85
40
82
45
64
58
42
20
45 44
10
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
Page | 5
Delayed recognition of the problem
SKO : ~2% absolute, 0.5% CAGR

HSD : ~42% absolute, 7.3% CAGR
MS : ~21% absolute, 3.9% CAGR
LPG : ~7% absolute, 1.4% CAGR
LPG (RHS)
Rs/l
Rs/cyl
320
300
280
260
240
220
200
FY10
o
o
o
o
MS
FY09
Increase in retail selling prices (RSP) of the sensitive

products was marginal over FY05-10 :
50.0
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
-
HSD
FY08
Despite the widening demand-supply mismatch, the

Indian government was less pro-active in taking
precautionary measures.
SKO
FY07
The combined impact of a weakening currency (~6%)

and hardening crude prices (~65%) over FY05-10 was
~74% (~12% CAGR).
FY06
Retail selling prices of sensitive products
FY05
Inadequate response from government during FY05-10
SKO : ~62% absolute, 13% CAGR

HSD : ~69% absolute, 14% CAGR
LPG : ~46% absolute, 10% CAGR
MS : ~57% absolute, 12% CAGR (Decontrolled)
MS
Rs/l
LPG (RHS)
Rs/cyl
70.0
450
400
60.0
50.0
350
40.0
300
30.0
20.0
250
10.0
-
200
FY14
o
o
o
o
80.0
HSD
FY13
MS (petrol) was decontrolled in FY10 with serious price

hikes in sensitive products RSP between FY10-14.
SKO
FY12
2009 was a crucial year in decision making for the

Indian government. Fuel subsidy crossed Rs 1tn in FY09
and Indias general elections concluded in May-09, with
the UPA government getting a clear mandate for a
second tenure.
FY11
Retail selling prices of sensitive products
FY10
Bold actions FY10 onwards helped marginally
Page | 6
Situation remained tight till FY14

Despite the decontrol of petrol and regular hikes in
retail prices of other sensitive products, the situation
didnt 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).
Diesel RSP vs. UR
60
40
20
LPG RSP
1,500
Rs/l
40
1,000
20
500
Apr-12
May-12
Jul-12
Aug-12
Oct-12
Nov-12
Jan-13
Feb-13
Apr-13
May-13
Jul-13
Aug-13
Oct-13
Dec-13
Jan-14
Mar-14
Apr-12
May-12
Jul-12
Aug-12
Oct-12
Nov-12
Jan-13
Feb-13
Apr-13
May-13
Jul-13
Aug-13
Oct-13
Dec-13
Jan-14
Mar-14
Source: PPAC, HDFC sec Inst Research
LPG RSP vs. UR

SKO UR
SKO RSP
Rs/l
60
Governments 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.
SKO RSP vs. UR

Diesel UR
Diesel RSP
80
LPG UR
Rs/l
Apr-12
May-12
Jul-12
Aug-12
Oct-12
Nov-12
Jan-13
Feb-13
Apr-13
May-13
Jul-13
Aug-13
Oct-13
Dec-13
Jan-14
Mar-14
Average oil under recovery for FY12-14 was ~Rs 1.5tn p.a., the biggest hazard to Indias fiscal health.
Total oil under recover (Rs tn)
Petrol
1.8
Diesel
SKO
LPG
Rs tn
1.6
Oil under recovery increased by ~7x

times over the last decade
1.39
1.4
1.0
0.8
0.4
0.2
-
0.20
0.1
0.1
0.0
FY05
0.40
0.49
0.1
0.1
0.1
0.1
0.2
0.2
FY06
FY07
0.77
0.2
0.2
0.2
0.3
0.4
0.5
FY08
FY09
1.61
0.4
0.3
1.03
1.2
0.6
Total
0.78
0.46
0.1
0.2
0.1
FY10
0.3
0.3
0.8
0.9
FY12
FY13
0.3
FY11
0.5
0.3
0.2
0.2
1.40
0.6
FY14
Sources : PPAC, Govt reports, HDFC sec Inst Research
Page | 7
FY15 : A new chapter for the Oil & Gas sector
40
SKO RSP
350
20
35
(5)
250
10
Apr-14
Dec-14
Nov-14
Oct-14
Sep-14
Jul-14
Aug-14
Dec-14
45
Nov-14
30
Rs/l
40
Oct-14
450
Jun-14
SKO UR
Sep-14
Rs/cyl
May-14
Dec-14
SKO RSP vs. under recovery
LPG UR
Aug-14
LPG RSP
Apr-14
Nov-14
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.
55
Dec-14
Oct-14
9MFY15 has seen a significant improvement in an

under recovery scenario
10
Sep-14
550
65
Aug-14
Jul-14
Jun-14
May-14
Apr-14
30
LPG RSP vs. under recovery
Diesel UR
UR Rs/l
50
Jul-14
Rs/l
60
Jun-14
Diesel RSP
70
May-14
Diesel RSP vs. under recovery
INR-USD (RHS)
$/bbl
120
110
100
90
80
70
60
50
40
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.
Oct-14
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.
Aug-14
Crude ($/bbl)
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.
Jun-14
Currency and crude price movement
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.
Apr-14
Page | 8
Future Energy Scenario : India

Based on an energy multiplier of ~0.8x, Indias 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.
100%
90%
80%
COAL
60%
OIL
50%
40%
Oil 29%
20%
10%
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 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 dont see any significant domestic gas addition in the near future
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,
Indias 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
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 Indias 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).
Coal 55%
70%
30%
Others 8%
OTHERS
(incl.
RENEWABLE)
Natural Gas 8%
0%
Indias Energy Mix CY13
(Source: BP, HDFC sec Inst Research)
NATURAL
GAS
Our View : Oils 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.
Page | 9
Way Ahead
(A) Sustained volume growth for OMCs despite the

entry of private players in auto fuel market
70
RO OMCs ('000)
RO Private ('000)
Pvt Gr (%)
OMC Gr (%)
'000 RO
60
1.4
2.8
3.3
3.0
3.5
12%
10%
50
8%
40
62
6%
Even with aggressive modeling of 8% growth for

private ROs vs. 4% for OMCs, we see substantial
room for OMCs volumes to grow.
30
10
2%
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%.
0%
49
51
53
4%
FY20E
46
FY19E
42
60
58
FY18E
20
56
FY17E
Retail outlet (RO) growth by PSU and private players
FY16E
However, the situation is less frightening for OMCs

as their ROs have almost doubled from 26k to 50k
over the period.
FY15E
We assume that by FY17, ~1,400 retail outlets will

be operational for both RIL and EOL (same as
2006).
FY14
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.
50
FY13
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.
FY12
100
FY20E
Increase in marketing margins
150
FY19E
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
FY18E
Reduction in govt receivables, debt and interest cost
KL/RO/m
FY17E
200
Pvt/RO/month
GDP Growth (%)
FY16E
Substantial reduction in oil under recovery
FY15E
FY14
Sustained volume growth despite private entrants
OMCs/RO/month
MS + HSD Growth (%)
FY13
Strong auto fuels demand led by robust GDP growth
FY12
We believe the following are key triggers for OMCs in the

coming future :
Page | 10

Oil under recovery breakup for India
(B) Substantial reduction in oil under recovery
Our base case assumption :
67
77
245
479
780
1,148
Under recovery sharing by different players

Government
1,800
Upstream
OMCs
Rs bn
1,600
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.
1,400
600
1,200
550
1,000
670
800
600
400
200
303
835
1000
410
708
424
233
178
194
159
204
FY17E
67
64
233
472
781
1,159
FY16E
65
50
207
429
717
1,070
FY15E
Crude
(USD/bbl)
Crude
(USD/bbl)
INR-USD
63
38
183
389
656
985
200
FY17E
50
65
80
95
110
61
26
159
349
597
903
389
FY17 oil UR (Rs bn) sensitivity with INR and crude

59
15
137
312
541
824
397
400
FY16E
65
64
219
437
718
1,062
627
600
FY15E
61
40
172
359
601
899
782
FY14
59
29
150
322
546
823
1,399
FY13
50
65
80
95
110
INR-USD
63
52
195
397
659
979
800
FY12
FY16 oil UR (Rs bn) sensitivity with INR and crude
Total
1,200
FY11
LPG
1,610
1,385
1,400
1,000
FY16 : Crude at USD 80/bbl, INR-USD at 63,

LPG/SKO volume growth at 6/0% YoY
FY17 : Crude at USD 80/bbl, INR-USD at 63,
LPG/SKO volume growth at 6/0% YoY
OMCs UR sharing fixed at 1.5% for FY16/17
Rs bn
1,600
SKO
FY14
1,800
Diesel
FY13
Petrol
FY12
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.
FY11
Page | 11
Total under recovery vs. government receivables
The past...
BPCL Gross UR
HPCL Gross UR
IOC Gross UR
Govt Total Receivables (RHS)
Government bore ~58% of the UR burden over FY1214 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.
1,500
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.
500
Rs bn
Rs bn
500
400
300
1,000
200
100
FY17E
FY16E
FY15E
FY14
FY13
FY11
2,000
FY12
(C) Lower UR = lower receivables/debt/interest
Declining debt and interest cost for OMCs
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.
1,600
Reduction in the interest cost alone will lead to an

additional earnings of ~Rs 6.9/13.7/4.9 for
BPCL/HPCL/IOC.
400
Rs bn
Rs bn
1,400
120
100
1,200
80
1,000
800
60
600
40
20
200
FY17E
FY16E
FY15E
FY14
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 Interest Cost RHS
FY13
HPCL Debt
IOC Debt
FY11
BPCL Debt
FY12
The future...
Page | 12
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.
IOC
Diesel Margin RS
Rs/t
Rs/l
5,000
2.00
1.75
4,000
3,000
1.50
2,000
1.25
1,000
FY17E
1.00
FY16E
FY15E
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.
6,000
HPCL
FY14
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 2030% post the decontrol. Petrol contributes 10-15% of
OMCs product portfolio.
BPCL
FY13
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.
FY12
Expansion in diesel and marketing margin
FY11
(D) Increase in marketing profitability led by diesel
Incremental boost from 10% increase in diesel margins

BPCL
HPCL
IOC
Diesel Vol.
FY14 (mn T)
18.3
16.0
36.9
PBT FY14
(Rs bn)
220
167
511
Incremental
PBT (Rs bn)
3.1
2.7
6.2
(%)
increase)
5.2%
10.1%
6.3%
Source: Company, HDFC sec Inst Research
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
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
Satish Mishra
+91-22-6171-7334
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.
Boost from the diesel decontrol : Diesel accounts for

~54% of BPCLs 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).
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.
Benefits from lower under recovery : BPCLs 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
We expect BPCLs 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 BPCLs
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).
FINANCIAL SUMMARY (Standalone)

(Rs bn)
Net Sales
EBITDA
PAT
EPS (Rs)
P/E (x)
P/BV (x)
RoE (%)
FY13
FY14
FY15E
FY16E
FY17E
2,401.16 2,600.61 2,238.47 2,061.55 2,063.16
61.07
80.86
49.27
71.52
89.01
26.43
40.61
23.40
38.73
49.69
36.6
56.2
32.4
53.6
68.7
17.6
11.5
19.9
12.0
9.4
10.3
7.6
10.9
7.5
6.1
16.8
22.5
11.6
17.4
19.8
BPCL : COMPANY UPDATE
Receivables/Govt Share (%)
80%
Rs bn
400
60%
300
40%
200
20%
100
FY17E
Higher receivables led to higher debt and

consequently higher interest cost.
FY16E
0%
FY15E
FY14
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.
500
Govt share
Govt Receivables
FY13
BPCLs 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.
BPCL Gross UR
FY12
Declining gross under recovery and Govt. receivables
FY11
The past
FY10
Lower Govt receivables = lower debt/interest
250
Interest Cost (RHS)
Rs bn
Rs bn
200
150
100
50
20
18
16
14
12
10
8
6
4
2
-
FY17E
FY16E
FY15E
FY14
Hence, total interest cost will reduce by ~55%.

Interest reduction alone will add ~Rs 6.9/share
(~13% of FY14 EPS).
Total Debt
FY13
Lower government sharing will lead to lower

receivables and timely payments. Consequently,
BPCLs total debt will reduce by ~40% to ~Rs
121bn.
Lowering debt and interest cost
FY12
BPCLs gross oil under recovery will decline to ~Rs

97bn/year FY16 onwards. Government sharing
will reduce to one-fourth to ~Rs 45bn/year.
FY11
FY10
The future
Page | 15
Every Rs 0.14/L (10%) increase in diesel margins has a

favourable impact of 5.2% on BPCL FY14 earnings.
EPS FY17 (Rs/sh)
72
69
74
26
22
77
76
19
20
FY17E
81
FY16E
80%
60%
82
84
40%
20%
0%
17
25
14
12
Rising marketing and diesel margins

Marketing Margins (Rs/t)
5,500
Diesel Margins (Rs/l) (RHS)
Rs/t
Rs/l
1.4
1.5
1.7
1.9
2.0
62.4
65.4
68.7
72.4
76.4
1.6
1.5
4,000
1.4
1.3
3,500
1.2
3,000
1.1
FY17E
FY16E
FY15E
FY14
FY13
1.0
FY12
2,500
FY11
Bear case : No increase in diesels margin

Base case : no change in FY15 and 10% p.a. increase in FY16/17
Bull case : Margins reaching Rs 2/l by FY17
1.8
1.7
5,000
4,500
FY17 EPS sensitivity with diesels gross margin

Diesel Margin (Rs/L)
Pipeline
FY15E
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.
100%
Marketing
FY14
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.
Refining
FY13
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.
Gross profit contribution from different segments
FY12
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%.
FY11
FY10
Substantial benefits from the diesel decontrol
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
Net D/E (RHS)
FY17E
FY16E
FY15E
FY14
FY10
FY17E
FY16E
FY15E
FY14
FY13
FY17E EPS Sensitivity
2.8
3.3
3.8
4.3
4.8
1,400
40.3
45.5
50.6
55.7
60.8
Diesel Margin (Rs/KL)

1,470
1,540
1,610
41.8
43.3
44.8
47.0
48.4
49.9
52.1
53.6
55.1
57.2
58.7
60.2
62.3
63.8
65.3
1,680
46.3
51.4
56.6
61.7
66.8
59
61
63
65
67
60
52.1
53.3
54.4
55.6
56.8
Crude price (USD/bbl)

70
80
90
51.8
51.4
50.9
52.9
52.5
51.9
54.0
53.6
53.0
55.2
54.7
54.0
56.3
55.8
55.1
100
50.3
51.3
52.3
53.3
54.3
GRM ($/bbl)
INR-USD
FY12
FY11
0.2
FY10
20
FY13
10
0.4
Dividend Yield
15
0.6
40
RoIC
20
0.8
60
GRM ($/bbl)
25
1.0
80
INR-USD
RoE
1.2
Rs bn
FY12
100
Rising returns
PAT (Rs bn)
FY11
EBITDA (Rs bn)
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.
3.5
4.0
4.5
5.0
5.5
59
61
63
65
67
1,400
52.1
57.2
62.4
67.5
72.6

1,540
1,694
1,863
55.2
58.5
62.1
60.3
63.6
67.3
65.4
68.7
72.4
70.5
73.8
77.5
75.6
79.0
82.6
2,050
66.2
71.3
76.4
81.5
86.6
60
66.8
68.2
69.6
71.0
72.4

70
80
90
66.5
66.1
65.6
67.8
67.4
66.8
69.2
68.7
68.1
70.6
70.0
69.4
71.9
71.4
70.7
100
65.0
66.2
67.4
68.7
69.9
Page | 17
ASSUMPTIONS
Refining Business
Throughput (mnT)
GRM (US$/bbl)
Marketing Business
Total Sales (mnT)
YoY Gr (%)
Diesel Volume (mn T)
Diesel Volume Gr (%)
Petrol Volume Gr (%)
Diesel's Margin (Rs/l)
Macro
INR-US$
Crude Price (US$/bbl)
Total Sector UR (Rs bn)
BPCL gross UR (Rs bn)
BPCL net UR (Rs bn)
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY18E
22.9
3.2
23.2
5.0
23.4
4.3
23.4
2.1
23.4
3.8
23.4
4.5
23.4
5.0
31.1
6.4
16.3
13.2
6.1
1.40
33.3
6.9
18.0
10.3
7.0
1.40
34.0
2.1
18.3
11.3
8.4
1.40
34.8
2.5
18.5
1.0
5.0
1.40
35.7
2.5
19.0
2.5
4.0
1.54
36.6
2.5
19.2
1.1
1.3
1.69
37.5
2.5
19.4
1.1
1.3
1.86
47.9
114.5
1,385
326
0.1
54.5
110.0
1,610
390
2.5
60.5
107.8
1,399
345
5.1
61.3
90.5
627
155
2.3
63.0
80.0
397
98
1.5
63.0
80.0
389
96
1.4
63.0
80.0
377
93
1.4
Source : Company, HDFC sec Inst Research
VALUATION (Based on FY17)

Business
Standalone
Refining & Marketing
Standalone net Debt
Standalone Equity Value
E&P
Mozambique
Brazil
E&P EV
E&P Debt
E&P Equity Value
Investments
Traded investments
Non traded investments
Investments Value
Value per share
EBITDA (Rs bn)
Multiple
Value (Rs bn) Value (Rs/sh)* Valuation basis
89.01
4.9#
436
57
378
664
88
577
EV/EBIDTA on FY17E
FY17E
0.85
134
13
204
19
223
120
103
15% discount to ONGC deal (10% @ $ 2.5bn)

Oil reserve of 200 mmboe @$5.0/bbl
68
42
111
790
35% discount to CMP

20% discount to BV
79
0.65
0.85
69
33
FY17E (assuming Rs 10bn capex p.a. using debt)
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)
STANDALONE BALANCE SHEET
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
849.61
960.18
1,071.67
946.55
900.27
914.06
1,121.59
1,258.20
1,308.98
1,100.39
942.06
907.93
22.61
27.69
28.96
28.81
30.25
31.77
LT Loans
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
14.01
16.56
13.61
13.61
13.61
13.61
Raw Material
Trading
Employee Cost
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
9.0
57.9
32.4
(39.1)
45.1
24.5
EBITDA growth %
EBITDA Margin %
Depreciation
(Rs bn)
FY12
FY13
FY14
FY15E
FY16E
FY17E
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
21.59
55.08
118.08
88.08
86.08
84.08
SOURCES OF FUNDS
Share capital
Deferred tax liability
1.8
2.5
3.1
2.2
3.5
4.3
Other LT Liabilities
0.56
0.61
0.61
0.61
0.61
0.61
18.85
19.26
22.47
22.33
24.07
25.81
Long term provisions
4.10
10.92
11.57
11.57
11.57
11.57
380.27
430.09
420.30
360.58
383.78
414.12
166.12
166.90
179.38
187.05
192.98
197.17
Other income
17.02
16.80
14.69
16.11
16.56
17.05
Total liabilities
EBIT
36.84
58.61
73.08
43.05
64.01
80.26
APPLICATION OF FUNDS
Interest Cost
18.00
18.25
13.59
8.12
6.20
6.10
PBT
Net fixed assets
18.84
40.36
59.49
34.93
57.81
74.16
Capital WIP
11.19
24.20
41.67
76.67
111.67
141.67
Taxes
5.73
13.93
18.88
11.53
19.08
24.47
LT Investments
49.70
69.42
72.38
72.38
72.38
72.38
RPAT
13.11
26.43
40.61
23.40
38.73
49.69
LT Loans and Advances
34.59
25.12
32.67
32.67
32.67
32.67
0.01
0.28
1.66
1.66
1.66
1.66
13.11
26.43
40.61
23.40
38.73
49.69
159.48
166.90
190.71
162.52
149.67
149.79
18.1
36.6
56.2
32.4
53.6
68.7
Debtors
63.78
40.25
40.80
33.73
31.06
31.09
(13.7)
101.6
53.7
(42.4)
65.5
28.3
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
Excep items
APAT
EPS
EPS Growth %
Other non current assets

Inventory
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
STANDALONE KEY RATIOS
(Rs bn)
FY12
FY13
FY14
FY15E
FY16E
FY17E
Reported PAT
13.11
26.43
40.61
23.40
38.73
49.69
PROFITABILITY %
FY12
FY13
FY14
FY15E
FY16E
FY17E
Non-operating income
7.47
8.71
9.84
10.79
11.09
11.43
EBITDA margin
1.8
2.5
3.1
2.2
3.5
4.3
PAT from Operations
5.64
17.72
30.77
12.61
27.64
38.26
EBIT margin
1.7
2.4
2.8
1.9
3.1
3.9
18.00
18.25
13.59
8.12
6.20
6.10
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
30.4
34.5
31.7
33.0
33.0
33.0
Interest
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)
EFFICIENCY
Free cash flow (FCF)
(41.81)
18.28
31.00
87.72
4.98
12.52
Tax rate %
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
Payables (days)
22
13
17
18
18
18
Non-operating income
11.40
11.26
9.84
10.79
11.09
11.43
Investments
(0.25)
(19.72)
(2.96)
(15.16)
(41.61)
(45.53) (54.21)
3.62
47.88
23.20
Interest
(18.00)
(18.25)
(13.59)
FFCE
(11.92)
23.23
(18.34)
Dividend
(4.55)
(9.23)
Others
(0.00)
(3.61)
FINANCING CASH FLOW ( c )
25.34
(4.28)
NET CASH FLOW (a+b+c)
(5.31)
5.54
(23.82)
Closing Cash & Equivalents
69.26
74.90
48.13
INVESTING CASH FLOW ( b )

Share capital Issuance
Debt Issuance
(53.91)
(48.57)
(35.75) (75.00)
(2.00)
(2.00)
Cash conversion cycle (days)
16
18
16
15
15
14
(8.12)
(6.20)
(6.10)
Net Debt/EBITDA (x)
3.7
2.6
1.9
1.4
1.0
0.8
4.60
(3.22)
4.42
Net D/E
1.0
1.0
0.8
0.3
0.3
0.3
(14.26)
(8.12)
(13.54)
(17.34)
Interest coverage
2.0
3.2
5.4
5.3
10.3
13.2
1.90
0.00
PER SHARE DATA
(61.70) (91.24)
(21.73)
(25.44)
EPS (Rs)
18.1
36.6
56.2
32.4
53.6
68.7
7.27
(5.66)
(1.49)
CEPS (Rs)
88.4
63.2
87.2
63.2
86.9
104.4
55.39
49.74
48.24
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
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
1.7
1.7
2.6
1.5
2.5
3.2
VALUATION
P/E (x)
Dividend Yield (%)
Page | 20
COMPANY UPDATE
8 JAN 2015
Hindustan Petroleum Corporation

BUY
INDUSTRY
OIL & GAS
Rs 569
Target Price
Rs 740
Nifty
8,102
Sensex
26,909
KEY STOCK DATA

Bloomberg/Reuters
HPCL IN/HPCL.BO
No. of Shares (mn)
339
193/3,045
1,085

52 Week high / low
Rs 628/214
3M
6M
12M
Absolute (%)
17.2
39.2
156.5
Relative (%)
14.8
36.1
126.5

Promoters
51.11
FIs & Local MFs
20.02
FIIs
14.10
Public & Others
14.77
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 HPCLs
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. HPCLs auto fuels volume growth will be
~2% vs. ~5.4% for the industry.
Source : BSE
We expect HPCLs gross UR to reduce to ~Rs 90bn in

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.
Satish Mishra
+91-22-6171-7334
Higher EBITDA and lower interest cost will boost

HPCLs 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).

~52% of HPCLs marketing volumes, with the marketing
Benefits from lower under recovery : HPCLs gross UR

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.

(Rs bn)
Net Sales
EBITDA
PAT
EPS (Rs)
P/E (x)
P/BV (x)
RoE (%)
FY13
FY14
FY15E
FY16E
FY17E
2,067.22 2,232.71 1,904.27 1,767.66 1,813.19
36.55
52.38
45.49
54.31
67.12
8.25
17.75
17.84
23.48
31.21
24.4
52.4
52.7
69.3
92.2
23.3
10.9
10.8
8.2
6.2
1.4
1.3
1.2
1.1
1.0
6.1
12.4
11.4
13.9
16.7
HPCL : COMPANY UPDATE
60
50
300
40
200
30
20
100
10
-
FY17E
FY16E
and
FY15E
debt
Rs bn
FY14
Higher receivables led to higher

Receivables/Govt share (%)
FY13
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.
400
Govt Receivables
FY12
HPCLs 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.
Govt share in UR
FY11
HPCL Gross UR
FY10
The past
Rs bn
Rs bn
300
25
20
250
200
15
150
10
100
50
FY17E
FY16E
FY15E
FY14
Hence, total interest cost will reduce by ~50%.

Interest reduction alone will add ~Rs 14/share (~27%
of FY14 EPS).
350
Interest Cost RHS
FY13

receivables and timely payments. Consequently
HPCLs total debt will reduce by ~35% to Rs 200bn.
Total Debt
FY12
HPCLs gross oil under recovery will decline to ~Rs

90bn/year FY16 onwards. Government sharing will
reduce to one-fourth to ~Rs 40bn/year.
FY11
FY10
The future
Page | 22
Every Rs 0.14/L (10%) increase in diesel margins

translates into an increase in HPCL FY14 earnings of
10.1%.
82
86
81
86
84
83
13
14
11
12
FY17E
FY16E
FY15E
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.
100%
Pipeline
Marketing
FY14
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.
Refining
FY13
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.
FY12
Amongst all the OMCs, contribution from the

marketing segment is largest for HPCL. Gross profit
from the marketing division for HPCL is ~82%.
80%
60%
81
71
40%
20%
0%
14
23
FY11
FY10
Biggest beneficiary of the diesel decontrol
Rising marketing and diesel margins

Marketing Margin (Rs/t)
5,000
Diesel Margins (Rs/l) RHS
Rs /l
Rs /t
1.8
1.7
4,500
1.6
1.5
4,000
1.4
3,500
80.6
86.1
92.2
98.8
106.2
Bear case : No increase in diesels margin

Base case : no change in FY15 and 10% p.a. increase in FY16/17
Bull case : Margins reaching Rs 2/l by FY17
1.2
3,000
1.1
2,500
1.0
FY17E
2.0
FY16E
1.9
FY15E
1.7
FY14
1.5
FY13
EPS FY17 (Rs/sh)
1.4
FY12
Diesel Margin (Rs/l)
1.3
FY11
FY17 EPS sensitivity with diesels gross margin
Page | 23

losses. However, we expect profitability to improve in
FY16/17 led by higher marketing margins and lower
debt.
Rising returns
FY10
FY17E
1,400
49.9
56.9
63.9
70.9
77.9
59
61
63
65
67
60
69.1
70.1
71.1
72.1
73.0

70
80
90
68.4
67.6
66.6
69.4
68.5
67.4
70.3
69.3
68.2
71.2
70.2
69.0
72.1
71.0
69.7

1,680
60.8
67.8
74.8
81.8
88.8
100
65.5
66.2
66.9
67.5
68.2
GRM ($/bbl)
1.5
2.0
2.5
3.0
3.5

1,470
1,540
1,610
52.6
55.3
58.1
59.6
62.3
65.1
66.6
69.3
72.1
73.6
76.3
79.1
80.6
83.3
86.1
INR-USD
FY16E
FY15E
FY14
FY13
FY12
FY11
FY17E
0.2
FY16E
0.4
FY15E
0.6
Dividend Yield
FY14
0.8
FY13
1.0
RoIC
FY11
1.2
GRM ($/bbl)
18
16
14
12
10
8
6
4
2
-
1.4
INR-USD
RoE
Net D/E (RHS)
Rs bn
FY10
80
70
60
50
40
30
20
10
-
PAT (Rs bn)
FY12

EBITDA (Rs bn)

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.
2.0
2.5
3.0
3.5
4.0
1,400
66.6
73.6
80.6
87.6
94.5

1,540
1,694
1,863
72.1
78.2
84.8
79.1
85.2
91.8
86.1
92.2
98.8
93.1
99.1
105.8
100.1
106.1
112.8
59
61
63
65
67
60
91.5
92.7
93.9
95.1
96.3

70
80
90
90.8
90.0
89.0
92.0
91.1
90.0
93.1
92.2
91.0
94.3
93.2
92.0
95.4
94.2
92.9
2,050
92.2
99.2
106.2
113.2
120.2
100
87.9
88.8
89.6
90.5
91.4
Page | 24
ASSUMPTIONS
Refining Business
Throughput (mnT)
GRM (US$/bbl)
Marketing Business
Total Sales (mnT)
YoY Gr (%)
Diesel Volume (mn T)
Macro
INR-US$
Crude Price (US$/bbl)
Total Sector UR (Rs bn)
BPCL gross UR (Rs bn)
BPCL net UR (Rs bn)
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY18E
16.2
2.9
15.8
2.1
15.5
3.4
15.5
2.0
15.5
2.5
15.5
3.0
15.5
3.3
29.5
9.1
14.2
15.3
7.5
1.4
30.3
2.8
15.5
8.7
5.2
1.4
31.0
2.1
16.0
3.3
8.6
1.4
31.7
2.5
16.1
1.0
5.0
1.4
32.5
2.5
16.5
2.5
4.0
1.5
33.3
2.5
16.7
1.1
1.3
1.7
34.2
2.5
16.9
1.1
1.3
1.9
47.9
114.5
1,385
304
0.1
54.5
110.0
1,610
362
2.1
60.5
107.8
1,399
325
4.8
61.3
90.5
627
146
2.2
63.0
80.0
397
92
1.4
63.0
80.0
389
90
1.4
63.0
80.0
377
88
1.3

Business
Standalone
Standalone net Debt
Investments
Traded investments
Investments Value
Value per share
EBIDTA (Rs bn)
Multiple
Value (Rs bn)
Value (Rs/sh) Valuation basis
67.12
5.1#
344
144
200
1015
424
591
EV/EBIDTA on FY17E
FY17E
0.65
0.80
20
47
38
111
149
740
35% discount to CMP

20% discount to BV

# Refining 2.5x, Marketing 5.0x, Pipelines 8.0x
Page | 25

(Rs bn)
Revenues
Growth (%)
Material Expenses
Employee Expenses
FY12
FY13
FY14
FY15E
FY16E
FY17E
1,783.36
2,067.22
2,232.71
1,904.27
1,767.66
1,813.19
33.6
15.9
8.0
(14.7)
(7.2)
2.6
1,654.90
1,921.56
2,065.26
1,745.13
1,597.26
1,627.43
15.83
25.26
20.30
21.72
23.24
(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
24.87
Total Shareholders Funds
131.23
137.26
150.12
161.59
176.67
196.70
Other Operating Exps
71.32
83.86
94.77
91.93
92.85
93.78
Long Term Debt
62.91
89.47
155.55
150.55
140.55
130.55
EBITDA
41.31
36.55
52.38
45.49
54.31
67.12
Short Term Debt
211.88
235.11
163.75
93.75
83.75
73.75
Total Debt
EBIDTA Margin (%)

Growth (%)
Other Income
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
10.30
54.71
62.11
72.08
82.17
93.67
106.79
2.3
1.8
2.3
2.4
3.1
3.7
24.9
(11.5)
43.3
(13.2)
19.4
23.6
10.26
11.02
9.74
9.92
10.11
Depreciation
17.13
19.84
22.02
19.92
21.81
23.70
LT Provisions
EBIT
34.44
27.74
40.10
35.49
42.60
53.71
TOTAL SOURCES OF FUNDS
Interest
22.24
14.13
13.36
8.45
7.03
6.43
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
RPAT
9.12
6.78
18.51
17.84
23.48
Exceptional items
APAT
Growth (%)
AEPS (Rs/sh)
4.37
4.99
5.88
5.88
5.88
5.88
495.95
564.93
586.46
533.01
539.60
552.75
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
16.08
LT Investments
74.83
82.66
57.36
57.36
57.36
57.36
31.21
LT Loans & Advances
14.99
19.38
14.61
14.61
14.61
14.61
Net Block
9.12
8.25
17.75
17.84
23.48
31.21
(33.8)
(9.5)
115.0
0.5
31.6
32.9
Inventories
26.9
24.4
52.4
52.7
69.3
92.2
Debtors
Cash & Equivalents

ST Loans & Advances
0.67
0.89
1.46
1.46
1.46
1.46
194.55
164.39
187.75
156.52
145.29
149.03
35.65
49.35
54.66
46.95
43.59
44.71
31.13
25.09
51.59
52.39
53.77
46.42
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
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

TOTAL APPLICATION OF
FUNDS
152.51
184.79
208.05
134.52
122.92
119.77
495.95
564.93
586.46
533.01
539.60
552.75
Page | 26

(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
17.13
19.84
22.02
19.92
21.81
23.70
22.24
14.13
13.36
8.45
7.03
(24.30)
(31.40)
20.11
84.41
24.49
Depreciation
Interest expenses
FY12
FY13
FY14
FY15E
FY16E
FY17E
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
6.43
RoE
7.1
6.1
12.4
11.4
13.9
16.7
8.92
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
25.2
41.9
33.0
34.0
34.0
34.0
3.8
3.9
3.9
3.4
3.3
3.3
Inventory (days)
40
29
31
30
30
30
PROFITABILITY %
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)
EFFICIENCY
(27.96)
(39.02)
18.19
83.98
30.04
23.35
Tax rate %
(1.59)
(7.83)
25.30
6.87
7.39
6.53
6.65
6.77
6.90
(39.99)
(42.93)
(16.67) (33.35)
(33.23)
(33.10)
Debtor (days)
38.50
49.79
(5.28)
(75.00)
(20.00)
(20.00)
Payables (days)
26
20
17
17
17
17
Interest expenses
(22.24)
(14.13)
(13.36)
(8.45)
(7.03)
(6.43)
21
18
22
22
22
22
FCFE
(11.70)
(3.36)
(0.46)
0.53
3.01
(3.07)
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
Dividend
(3.35)
(3.37)
(6.14)
(6.38)
(8.40)
(11.17)
Interest coverage
1.5
2.0
3.0
4.2
6.1
8.4
Others
(0.00)
0.36
1.66
0.00
PER SHARE DATA
12.91
32.65
(23.13) (89.83)
(35.43)
(37.60)
EPS (Rs)
26.9
24.4
52.4
52.7
69.3
92.2
(9.77)
(6.81)
26.89
0.80
1.38
(7.35)
CEPS (Rs)
77.5
82.9
117.4
111.5
133.8
162.1
EO Items
(0.00)
0.76
(0.39)
DPS (Rs)
8.5
8.5
15.5
16.1
21.2
28.2
31.13
25.09
51.59
52.39
53.77
46.42
387.5
405.4
443.3
477.2
521.7
580.9
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)
1.5
1.5
2.7
2.8
3.7
5.0
Investments
Other Income
Debt Issuance
BV (Rs)
VALUATION
P/E (x)
Dividend Yield (%)
Page | 27
COMPANY UPDATE
8 JAN 2015
Indian Oil Corporation

BUY
INDUSTRY
OIL & GAS
Rs 335
Target Price
Rs 425
Nifty
8,102
Sensex
26,909
KEY STOCK DATA

Bloomberg/Reuters
IOCL IN/IOC.BO
No. of Shares (mn)
2,428
814/12,874
465

52 Week high / low
Rs 411/194
3M
6M
12M
Absolute (%)
(6.2)
(2.0)
67.8
Relative (%)
(8.6)
(5.1)
37.8

Promoters
68.57
FIs & Local MFs
4.42
FIIs
2.61
Public & Others

Source : BSE
Satish Mishra
+91-22-6171-7334
24.40
Diversified and sturdy

IOC has the most diversified business portfolio
amongst OMCs. At one end it has an annuity/nonvolatile 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. IOCs auto fuels
volume growth will be ~2% vs. ~5.4% for the sector.
We expect IOCs gross UR to reduce to ~Rs 200bn in
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 IOCs
RoE/RoCE to 13/9% in FY17 vs. 9/6% in FY14. Strong
growth, improving ratios, healthy dividend yield (34%) 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).

~46% of IOCs marketing volumes with the marketing
Benefits from lower under recovery : IOCs gross UR

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.

(Rs bn)
Net Sales
EBITDA
APAT
FY13
FY14
FY15E
FY16E
FY17E
4,470.96 4,732.10 4,127.32 3,769.59 3,786.55

137.37
156.06
116.11
161.75
210.54
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
IOC : COMPANY UPDATE
80
600
60
400
40
200
20
FY17E
FY16E
FY15E
FY14
FY13

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

receivables. IOCs total debt (excluding Paradeep
Refinery expansion debt of ~Rs 150bn) will reduce
by ~45% to Rs 450bn.
1,200
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.
600
Interest - Paradeep (RHS)

Paradeep Debt
Rs bn
Rs bn
70
60
1,000
50
800
40
30
400
20
200
10
-
FY17E
FY16E
120
100
800
FY15E
IOCs gross oil under recovery will decline to ~Rs

200bn/year FY16 onwards. Government sharing will
reduce to one-fourth to ~Rs 100bn/year.
FY14
Rs bn
FY13
The future
Receivables/Govt share (%)
FY12
Higher receivables led to higher debt and

Govt Receivables
FY12
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.
1,000
Govt share
FY11
IOCs 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.
IOC Gross UR
FY10
FY11
The past
FY10
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. Its 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

Throughput - Existing
80.0
Throughput - Paradeep
GRM - Existing (RHS)
GRM - Paradeep (RHS)
Cumulative GRM (RHS)
$/bbl
mn T
8.0
70.0
7.0
60.0
6.0
50.0
5.0
40.0
4.0
30.0
3.0
20.0
2.0
10.0
1.0
FY17E
FY16E
FY15E
FY14
FY13
FY12
FY11
FY10
Page | 30

Diversified business portfolio
IOCs 75-80% of gross profit comes from stable
businesses like pipelines, marketing and petchem.
23

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
RoE
Net D/E (RHS)
200
150
1.0
20
0.8
15
0.6
100
0.4
FY10
FY17E
FY16E
FY15E
FY14
FY13
FY12
FY11
0.2
FY10
Dividend Yield
10
50
RoIC
FY17E
1.2
Rs bn
25
FY16E
PAT (Rs bn)
FY15E

250
1.0

losses. However we expect profitability to improve in
FY16/17 led by higher marketing margins and lower
debt.
EBITDA (Rs bn)
1.2
FY17E
10
17
1.4
FY14
FY11
FY10
0%
59
1.8
1.6
FY16E
16
20
30
63
Rs/l
Rs/t
FY13
24
68
4,400
4,200
4,000
3,800
3,600
3,400
3,200
3,000
FY15E
16
FY14
20%
7
12
Marketing Margins
FY14
61
40%
8
14
FY13
63
FY13
68
7
13
FY12
60%
7
13
FY12
58
80%
7
14
Diesel Margins RS
FY12
65
4
12
FY11
1
12
Chemical
FY17E
10
Marketing segment and diesels margins
Pipeline
FY16E
100%
Marketing
FY15E
Refining
FY11
Expansion in the marketing biz profitability

IOC will benefit from the decontrolled scenario as
~60% of its profits come from marketing.
Page | 31
59
61
63
65
67
60
27.2
28.4
29.5
30.7
31.8

70
80
90
27.0
26.7
26.4
28.1
27.9
27.5
29.3
29.0
28.6
30.4
30.1
29.6
31.5
31.1
30.7

1,680
23.4
27.1
30.8
34.5
38.2
GRM ($/bbl)
1.5
2.0
2.5
3.0
3.5
1,400
19.7
23.4
27.1
30.8
34.5

1,470
1,540
1,610
20.6
21.5
22.5
24.3
25.2
26.2
28.0
29.0
29.9
31.7
32.7
33.6
35.4
36.4
37.3
100
26.0
27.1
28.1
29.2
30.2
INR-USD
INR-USD
GRM ($/bbl)
1.5
2.0
2.5
3.0
3.5
59
61
63
65
67
1,400
28.9
32.7
36.4
40.2
43.9

1,540
1,694
1,863
30.8
32.9
35.0
34.6
36.7
38.8
38.3
40.4
42.5
42.1
44.2
46.3
45.8
47.9
50.0
2,050
37.1
40.8
44.6
48.3
52.0
60
37.9
39.4
41.0
42.6
44.1

70
80
90
37.6
37.4
37.0
39.2
38.9
38.5
40.7
40.4
40.0
42.3
41.9
41.5
43.8
43.5
43.0
100
36.6
38.1
39.6
41.0
42.5
ASSUMPTIONS
Refining
Throughput (mnT)
GRM (USD/bbl)
Paradeep Throughput (mnT)
Paradeep GRM (USD/bbl)
Marketing
Volumes (mnT)
YoY Gr (%)
Petchem Volumes (mn T)
Pipeline
Volumes (mnT)
Revenues (Rs/kg/km)
Macro
Crude Price (USD/bbl)
USD - INR
Total sector's UR
IOC's UR
Net UR
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY18E
55.6
3.6
54.6
3.2
53.1
4.2
54.7
2.0
55.3
3.3
4.5
5.0
55.8
4.0
12.0
7.5
55.8
4.5
15.0
8.0
75.7
3.8
7.9
5.2
1.4
1.55
76.5
1.0
4.4
4.1
1.4
2.08
79.7
4.1
3.5
3.5
1.4
2.12
81.7
2.5
1.0
5.0
1.4
2.16
83.7
2.5
2.5
4.0
1.5
2.20
85.8
2.5
1.1
1.3
1.7
2.25
87.9
2.5
1.1
1.3
1.9
2.29
75.0
62.6
75.6
76.9
73.1
79.5
74.2
81.1
75.3
82.7
77.5
84.4
78.7
86.1
114.5
47.9
1,385.41
754.68
3.64
110.0
54.5
1,610.29
857.94
5.49
107.8
60.5
1,398.69
729.38
10.83
90.5
61.3
627.25
327.09
4.91
80.0
63.0
397.32
207.19
3.11
80.0
63.0
388.53
202.61
3.04
80.0
63.0
377.25
196.73
2.95
Page | 32

Business
Standalone
Standalone net Debt
Investments
Traded investments
Investments Value
Value per share
EBITDA (Rs bn)
Multiple
210.54
5.1#
0.65
0.80
Value (Rs bn) Value (Rs/sh)* Valuation basis

1,066
344
722
450
283
125
78
42
120
425
EV/EBIDTA on FY17E
FY17E
305
35% discount to CMP
20% discount to BV
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
Page | 33

(Rs bn)
Revenues
Growth (%)
Material Expenses
Employee Expenses
FY12
FY13
FY14
FY15E
FY16E
FY17E
3,984.78
4,470.96
4,732.10
4,127.32
3,769.59
3,786.55
21.8
12.2
5.8
(12.8)
(8.7)
0.4
3,542.22
4,027.06
4,220.96
3,649.94
3,222.26
3,160.08
49.77
72.71
66.19
69.50
72.97
76.62
(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
Other Operating Exps
208.35
233.82
288.89
291.78
312.60
339.32
Long Term Debt
168.27
214.14
316.84
311.84
306.84
301.84
EBITDA
184.44
137.37
156.06
116.11
161.75
210.54
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
52.42
55.13
56.16
56.16
56.16
56.16
3.33
114.35
134.12
134.12
134.12
134.12
2.58
3.75
3.90
3.90
3.90
3.90
EBIDTA Margin (%)

Growth (%)
Other Income
Depreciation
EBIT
Interest
4.6
3.1
3.3
2.8
4.3
5.6
57.3
(25.5)
13.6
(25.6)
39.3
30.2
31.98
35.15
34.17
32.17
31.56
30.52
LT Provisions
48.68
52.01
57.60
51.43
60.93
68.92
167.74
120.51
132.63
96.85
132.38
172.14
Deferred Taxes
TOTAL SOURCES OF FUNDS

55.91
64.09
50.84
38.14
32.67
32.97
(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
Exceptional items
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
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
Inventories
AEPS
37.6
20.6
24.1
17.0
29.0
40.4
Debtors
1,340.34 1,567.73 1,660.09 1,461.99 1,427.57 1,431.32
0.17
0.14
0.70
0.70
0.70
0.70
568.29
593.14
646.97
564.29
515.38
517.70
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
85.80
67.63
73.92
73.92
73.92
73.92
1,217.28 1,312.34 1,345.78 1,073.48
993.01
986.96
Other Current Assets

Total Current Assets
Creditors
303.45
296.68
356.97
311.35
284.36
285.64
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

TOTAL APPLICATION OF
FUNDS
459.01
599.87
481.73
255.06
201.57
194.24
1,340.34 1,567.73 1,660.09 1,461.99 1,427.57 1,431.32
Page | 34

(Rs bn)
FY12
FY13
FY14
FY15E
FY16E
FY17E
Reported PAT
39.55
50.05
70.19
41.38
70.30
98.12
(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
Non-operating & EO items
Interest expenses
55.91
64.09
50.84
38.14
32.67
32.97
(183.27)
22.49
98.51
216.84
40.94
(4.70)
(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)
(120.32)
85.30
261.24
118.69
109.86
(20.05)
Investments
(2.15)
(1.15) (112.79)
Other Income
21.43
23.55
(15.00)
(15.00)
(15.00)
22.90
21.55
21.15
20.45
(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)
23.92
(4.13)
57.20
(1.90)
6.02
16.89
(14.08)
(17.61)
(24.71)
(14.49)
(24.71)
(34.37)
(0.02)
0.04
3.20
(0.00)
0.00
0.00
130.14
(1.65)
FCFE
Dividend
Others
(49.62) (277.63) (137.38) (127.34)
29.10
0.70
(54.21)
(9.84)
(12.55)
(12.03)
EO Items
(49.77)
0.04
11.70
140.68
141.42
98.91
89.08
76.53
64.50
PROFITABILITY %
EBITDA margin
EBIT margin
APAT margin
RoE
Core RoCE
RoCE
EFFICIENCY
Tax rate %
Inventory (days)
Debtor (days)
Payables (days)
Net Debt/EBITDA (x)
Net D/E
Interest coverage
PER SHARE DATA
EPS (Rs)
CEPS (Rs)
DPS (Rs)
BV (Rs)
VALUATION
P/E (x)
P/Cash EPS (x)
P/BV (x)
EV/EBITDA (x)
EV/Revenue (x)
OCF/EV (%)
FCFF/EV (%)
FCFE/M CAP (%)
Dividend Yield (%)
FY12
FY13
FY14
FY15E
FY16E
FY17E
4.6
4.2
2.3
16.1
11.2
12.2
3.1
2.7
1.1
8.4
6.0
7.3
3.3
2.8
1.2
9.2
5.0
5.9
2.8
2.3
1.0
6.1
3.5
4.4
4.3
3.5
1.9
9.9
6.0
6.5
5.6
4.5
2.6
12.8
8.6
8.5
(5.3)
3.4
52
9
28
33
3.1
1.0
3.0
11.4
3.3
48
9
24
33
4.7
1.1
1.9
29.3
3.3
50
9
28
31
4.5
1.1
2.6
29.5
3.0
50
9
28
31
4.2
0.7
2.5
29.5
3.0
50
9
28
31
2.6
0.6
4.1
29.5
3.1
50
9
28
31
1.8
0.5
5.2
37.6
57.6
5.0
238.4
20.6
42.0
6.2
251.8
24.1
47.8
8.7
271.8
17.0
38.2
5.1
282.9
29.0
54.1
8.7
301.7
40.4
68.8
12.1
327.9
8.9
5.8
1.4
7.2
0.3
(0.8)
(13.3)
2.9
1.5
16.3
8.0
1.3
10.2
0.3
11.7
(6.0)
(0.5)
1.9
13.9
7.0
1.2
8.7
0.3
17.9
2.5
7.0
2.6
19.7
8.8
1.2
9.7
0.3
28.9
19.8
(0.2)
1.5
11.6
6.2
1.1
6.5
0.3
17.6
8.2
0.7
2.6
8.3
4.9
1.0
4.7
0.3
17.8
7.8
2.1
3.6
Page | 35
Rating Definitions
BUY
: Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL
: Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
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.
Any holding in stock No
Disclaimer:
This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or
arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of
warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for
information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be
construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments.
This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any
locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC
Securities Ltd or its affiliates to any registration or licensing requirement within such jurisdiction.
If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may
not be reproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd .
Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived
from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.
It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services
for, any company mentioned in this mail and/or its attachments.
HDFC Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies)
mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the
company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and
other related information and opinions.
HDFC Securities Ltd, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any
action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the
dividend or income, etc.
HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report,
or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report.
HDFC Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any
other assignment in the past twelve months.
HDFC Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report
for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or
specific transaction in the normal course of business.
HDFC Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research
report. Accordingly, neither HDFC Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is
not based on any specific merchant banking, investment banking or brokerage service transactions. HDFC Securities may have issued other reports that are inconsistent with and reach
different conclusion from the information presented in this report.
Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We
have not received any compensation/benefits from the subject company or third party in connection with the Research Report.
Page | 36
HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,
Mumbai - 400 013
Board : +91-22-6171 7330
www.hdfcsec.com
Page | 37

Oil - Downstream - Update - Jan 15

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Oil - Downstream - Update - Jan 15

Enviado por

Direitos autorais:

Formatos disponíveis

SECTOR UPDATE

Valuation (on FY17E Standalone)

OMC stocks have fallen by 0-7% over the last month.

Weakness in refining is not disastrous : Fall in crude

FY15 witnessed a series of positive developments. A

OMCs set to benefit

An imminent expansion in diesel marketing margin is

EBITDA (Rs bn)

BPCL : Perfectly placed to capture the upsides from

Risks : (1) Sharp volatility in crudes price/exchange rate

PAT (Rs bn)

DOWNSTREAM OIL: SECTOR UPDATE

Marketing to refining ratio of

Best return ratios amongst

Exposure in E&P through stakes

Highest marketing to refining

Marketing to refining ratio of

~20% of EBITDA comes from

15 mTpa Paradeep refinery

10% rise in diesel mktg margins

10% rise in diesel mktg margins

10% rise in diesel mktg margins

Traded investments @ 35%

Traded investments @ 35%

Traded investments @ 35%

Investments value Rs 214/sh

Investments value Rs 149/sh

Investments value Rs 120/sh

Target Rs 790/sh, BUY

Target Rs 740/sh, BUY

Target Rs 425/sh, BUY

Source: HDFC sec Inst Research

Long Term (P/BV)/RoE = 9.3

LT avg 1-year fwd RoE = 9.9%

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

Long Term (P/BV)/RoE = 8.7

LT avg 1-year fwd RoE = 10.7%

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

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

LT avg 1-year fwd P/BV = 1.0x

LT avg 1-year fwd RoE = 13.3%

Long Term (P/BV)/RoE = 7.6

DOWNSTREAM OIL : SECTOR UPDATE

Recap of the past decade

Indias GDP grew at an average rate of 7.5% over the last

Indias GDP growth and Energy consumption multiplier

Source: Govt reports, BP, HDFC sec Inst Research

Sensitive Product Gr (%)

Auto Fuel Gr (%)

Avg Sens prod (%)

Avg Auto fuel (%)

Increasing penetration of LPG and declining

Consumption growth of sensitive products in India

Increasing urbanization and rising discretionary spends

Source: PPAC, Govt reports, HDFC sec Inst Research

DOWNSTREAM OIL : SECTOR UPDATE

Other associated variables were against India

There are three associated variables along with

Rising crude demand-supply mismatch

Source: PPAC, Govt reports, HDFC sec Inst Research

Problems further aggravated on the back of a weakening