Buy HPCL; target of Rs 1359: Motilal Oswal

HPCL plans capex of INR558b over FY16-21, which includes ~INR257b for refineries, ~INR262b for marketing, and the remaining for renewables, R&D and JV projects. For the next two years, capex will be funded through internal accruals; could take loan in later years as refinery capex will be back-ended. Refinery capex of INR257b includes INR42b for Euro VI upgradation and brownfield expansions (a) at Vizag from 8.3 to 15mmt (~INR200b, up from INR170b) along with upgradation, (b) at Mumbai from 6.5 to 9.5mmt (INR42b) and (c) JV Bhatinda refinery from 9 to 11.3mt (INR24b) Expects overall GRM to improve by ~USD1.5-2/bbl: (a) Vizag to complete by April 2020 and expand GRM by USD4-5/bbl, (b) Mumbai to complete in three years and expand GRM by USD1-1.5/bbl and (c) Bhatinda by Jun-17.  Expects GRM to remain stable in the medium term (FY16 GRM: USD6.7/bbl), at USD5-7/bbl helped by higher distillate yields.

 

Of the three OMCs, HPCL’s earnings are more sensitive to a change in the marketing margin, given its higher ratio of marketing-to-refining volume. On SA basis, HPCL trades at 7.3x FY18E EPS of INR140.6 and 1.4.x FY18E BV. On a consol. basis, HPCL trades at 6.1x FY18 EPS of INR169. We value HPCL at 5.5x for refining and 8x for marketing to arrive at a fair value of INR1,359, implying a 32% upside. Dividend yield is attractive at ~3-4%. Maintain BUY. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.