Expectations of a fuel price hike have resulted in stocks of oil marketing companies (OMCs) like Hindustan Petroleum Corp Ltd (HPCL), Bharat Petroleum Corp Ltd (BPCL) and Indian Oil Corp Ltd (IOCL) witnessing a strong rally. Since December 21, HPCL has gained 15.8 per cent, BPCL is up by 10.2 per cent while IOCL has gained 8.4 per cent.
The rally in OMC stocks got a further boost on January 4, 2013 after the Kelkar Committee made its recommendations. It suggested an immediate hike in fuel (diesel, LPG & kerosene) prices and complete deregulation of diesel prices by the start of fiscal 2014-15. The Committee was appointed by the finance ministry to suggest a roadmap for fiscal consolidation.
Analysts bullish on HPCL
Most analysts believe HPCL, being the most sensitive to price reforms, would be the biggest gainer in case of a fuel price hike. In their recent (January 2013) report, Credit Suisse’s analysts have observed that IOC, BPCL and HPCL stocks could see a 61 per cent, 54 per cent and 96 per cent upside respectively in case of retail pricing reforms being implemented.
| IMPROVING PROFITABILITY | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net revenues | 185,087 | 191,560 | 202,834 |
| % change y-o-y | 33.6 | 3.5 | 5.9 |
| Ebitda | 3,945 | 4,954 | 5,288 |
| Ebitda (%) | 2.1 | 2.6 | 2.6 |
| Net profit | 176 | 1,588 | 1,780 |
| % change y-o-y | -89.6 | 802.0 | 12.1 |
| EPS (Rs) | 4.5 | 45.8 | 51.4 |
| PE (x) | 71.7 | 7.1 | 6.3 |
| E: Estimates Consolidated financials Source: Edelweiss Research | |||
Edelweiss’ analysts too are bullish and have recommended HPCL to be EDELSTAR with a price target of Rs 360, which means an upside of 12 per cent from the current price level of Rs 323.
Though petrol is de-controlled, diesel, kerosene and cooking gas (LPG) prices are administered by the government (subsidised). This leads to losses for the oil companies as they sell fuel at prices lower than cost price.
Further, with the government’s own finances in doldrums, payments are delayed leading to further working capital stress.
Analysts at Credit Suisse estimate that a monthly Rs 1 per litre increase in diesel prices starting January 13, 2013 will result in under-recoveries in FY14 and FY15 being lower by Rs 67,000 crore and Rs 86,100 crore, respectively. A similar kerosene price increase over a two-year period will save Rs 2,600 crore and Rs 5,200 crore in FY14 and 15, respectively.
This would lead to downstream companies (IOC/ BPCL/HPCL) witnessing a reduced cash flow pressure and borrowing costs. Reduced subsidy overhang may lead to a re-rating of earnings multiples.
If these companies are able to reduce inventory and forex volatility as well, analysts estimate they should be able to deliver return-on-equity (RoE) of 11-16 per cent.
Assuming that they would then trade at 1.0-1.3 times FY13E book value and adjusting for value of investments, IOC, BPCL and HPCL stocks could have an upside of 61 per cent, 54 per cent and 96 per cent, respectively. A larger upside would arise if margins on the marketing of retail fuels increases, which seems unlikely for now.
HPCL, according to Edelweiss, being an integrated refining and marketing player with a higher share in the metros, has the advantage of higher margins, higher growth rate, and lower competition. HPCL has branded its retail outlets in the name ‘CLUB HP’. It also had launched ‘Turbojet’ branded diesel and ‘Power’ branded petrol in India, which increased the profitability of the company. It has a 6,667-strong nation-wide retail outlet network, the third largest in India after IOCL and BPCL.
Analysts at Edelweiss add that among OMCs, HPCL is the most levered to a fall in crude prices. They see limited upsides in crude, given surging supplies from OPEC and a falling demand for crude to decline through 2016. Edelweiss estimates FY12E and FY13E EPS at Rs 45.8 and Rs 51.4. The stock is currently trading at an EV/Ebitda of 7.3x on FY12E basis and at 6.5x on FY13E basis. Given these attractive valuations and its growth prospects, analysts believe the stock offers upside potential in the near term.
However, there are words of caution, too. Diesel and kerosene price hikes are politically sensitive issues and in the backdrop of initial price hikes, uncertainties would still remain over complete de-control on diesel prices taking place.
