Oil & Gas -...

Thematic | January 2017

Oil & Gas

The Three MusketeersSwarnendu Bhushan ([email protected]); +91 22 6129 1529

Abhinil Dahiwale ([email protected]); +91 22 3980 4309

Investors are advised to refer through important disclosures made at the last page of the Research Report.Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

3 January 2017 2

Thematic | Oil & Gas

Contents | Oil & Gas: The three musketeers Summary .............................................................................................................................. 3

Standing up for the three musketeers, once again ................................................................ 5

A consumption-led story ....................................................................................................... 6

High GRMs – a dance of Mayflies? ...................................................................................... 14

The big gets bigger! ............................................................................................................. 19

Key risks .............................................................................................................................. 24

Indian Oil Corporation ........................................................................................................ 25

Bharat Petroleum ............................................................................................................... 30

Hindustan Petroleum .......................................................................................................... 35

The Three Musketeers by Alexandre Dumas is one of the most popular fictions ever written. Set in the early seventeenth century, the story is about how the three musketeers – Athos, Porthos and Aramis – helped a young gentleman – d’Artagnan – in his quest to join the elite Musketeers of the Guard. We expect history, although fictional, to repeat itself. The three OMCs are exhibiting the traits of the musketeers. Emboldened by deregulation and a high consumption growth environment, the OMCs are likely to help investors in their quest for higher returns.

3 January 2017 3


2.4

2.9 2.7 2.7

3.1

1.8

2.6

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Diesel Petrol

The three musketeers Improving cash flows for IOCL – our top pick among the OMCs

Oil marketing companies (OMC) have outperformed the Sensex by 205% over FY14-16 and earnings growth has been 3.8x that of Sensex. As a result, higher RoEs (up from 10% to 18%) and lower gearing (debt:equity down from 1.5 to 0.75) make a case for a re-rating.

The three oil marketing companies (OMCs) - Indian Oil Corporation (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) - accounted for ~3% of MOSL universe corporate profits in FY14 and FY15. This contribution rose to 6% in FY16, and is estimated at 7.2% in FY17. RoE of the OMCs is 18%, as against 12% for our universe. However, market cap of the OMCs is low at ~2.5% of our universe and their FY17 valuations (P/E) are at 54% discount to our universe.

Private sector players have taken a backseat, with only ~4% auto-fuel market share in the 24 months post deregulation. Also, current marketing margins will not allow greenfield investments in marketing. We thus expect the private sector share to continue remaining low.

Capital allocation will be more sensible as we expect dividend payout of more than 30% for the OMCs. This, in turn, has translated into a yield of ~3.7% for the OMCs v/s Sensex dividend yield of 1.8% and oil sector bellwether Reliance Industries' (RIL) dividend yield of 0.9%.

Marketing, a consumption-led story… Improving road connectivity, rising urbanization and expansion of urban centers

in India have boosted demand for two wheelers significantly. Resultantly, petrol consumption grew 14.5% in FY16 and 11.7% over April-November 2016.

Similarly, rising industrial and agricultural activities led to diesel consumption growth of 7.5% in FY16 and 4.2% over April-November 2016.

Over FY17-19, we expect diesel consumption in India to grow by 10% and petrol consumption by 5%, aiding marketing EBITDA of the OMCs.

…But high GRMs seem to be a dance of Mayflies? After ending FY16 at USD7.5/bbl, the benchmark Singapore GRM declined to

USD4.8 over April-August 2016. However, due to large outages and clamp down on Chinese teapot refineries, it climbed to USD6-8 over September-November 2016.

The expiry of Chinese tax breaks on smaller vehicles from January 2017, the end of driving season in the US and the increasing supply glut of 2.2m bopd over 2016-21 should lead to a moderation in global refining margins to USD5-6 over next 2-3 years, in our view.

Oil & Gas

Gross marketing margins (INR/ltr)

5.8

4.3 4.1 5.2

3.0

6.1

5.2

7.9

6.1

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-16

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Singapore GRM (USD/bbl)

Thematic | January 2017

3 January 2017 4


The big gets bigger! Among the OMCs, we prefer IOCL. It is stabilizing its ultra-modern 15mmtpa

Paradip refinery. Aided by Paradip, we believe that the company would be able to clock a GRM of USD5.8/bbl over FY17-19. Product availability from Paradip would also help in ramping up its retail fuel sales in the south.

BPCL would also be able to increase its market share in the south due to increased product availability from the expanded Kochi refinery.

We believe HPCL is most vulnerable to market share loss to the other OMCs until its Vizag expansion is completed.

Major capex projects of IOCL and BPCL are already completed, while HPCL is embarking on capex that is almost half the size of its market cap.

Global peers are trading at 10.7x one-year forward P/E and 6.8x one-year forward EV/EBITDA. Compared to this, IOCL is trading at 8.6x FY18E EPS and 6.1x FY18E EBITDA, BPCL at 11.6x FY18E EPS and 7.7x FY18E EBITDA, and HPCL at 10.3x FY18E EPS and 7.8x FY18E EBITDA.

We value the OMCs using SOTP. We value IOCL at INR464 (upside: 34%), BPCL at INR756 (upside: 16%) and HPCL at INR543 (upside: 17%), respectively. We recommend a buy rating for all the OMCs with a strong preference for IOCL.

With Paradip completion, we

expect IOCL to generate free cash flow of INR47/share over FY17-19

We expect, refining to get boost from Kochi and marketing to

add INR57b of EBITDA in FY19

We expect, Bhatinda to boost performance with higher refining margins

OMC’s have outperformed Sensex by 203% since January 2014

350

528

293 333

128

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B P C L H P C L I O C L OMC Sensex

3 January 2017 5


Standing up for the three musketeers, once again A case for re-rating

The recent hike in auto fuel prices amid a sharp rise in oil prices confirms the independence of the OMCs and reaffirms our faith in deregulation.

Private players have not been able to take significant market share since diesel deregulation more than two years ago. Low marketing margins of the OMCs ensures that the scenario will remain so going forward.

The government has excise duty on petrol and diesel as an additional tool to manage retail fuel prices if inflation becomes a concern.

Profitability intact Post the recent price hikes, the gross margin on petrol and diesel is back to

INR2.7/liter, marginally lower than the previous fortnight. Additionally, there would be substantial inventory gain due to the recent rally in oil prices.

We do not expect crude oil prices to sustain above USD60/bbl for long due to the expected non-compliance within OPEC and non-OPEC countries with respect to agreed production cuts.

The Indian government has increased excise duty on petrol and diesel by INR12/liter and INR14/liter, respectively, since November 2014. This leaves ample room for the government to manage inflation without tinkering with the deregulated regime.

Exhibit 1: Gross margin on auto fuels (INR/ltr)

Source: PPAC, MOSL

0.01.02.03.04.05.06.07.0

0.0

1.0

2.0

3.0

4.0

5.0

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

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15

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16

Feb-

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Mar

-16

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Petrol Diesel

Unshackling of the OMCs looks permanent

3 January 2017 6


A consumption-led story Expect strong growth in petrol and diesel consumption

India’s per capita consumption of refined products at nearly one-fifth of global average is much less than that of countries like the US, Germany, France and even China.

India has the second largest road network in the world, but its per capita road network is low in international comparison. We expect passenger traffic/road freight CAGR of 11%/7.8% until 2022, resulting in high demand for automotive fuels.

IOCL has a market share of 43.4% in petrol, followed by BPCL (27.5%) and HPCL (25.7%). Non-OMCs have been able to take only ~3.4% market share so far post deregulation.

Similarly, IOCL has a market share of 48.0% in diesel, followed by BPCL (25.9%) and HPCL (22.6%). Non-OMCs have been able to take only ~3.5% market share in diesel.

India’s refined products consumption at 1/5th of global average Average global per capita petroleum consumption stands at 746 liters/year. The

US has per capita consumption of 3,464 liters/year, while other developed countries like Germany and France consume 1,719 liters/year and 1,545 liters/year, respectively. In comparison, India’s per capita consumption still stands at 174 liters/year. Even China consumes 2.6x that of India.

However, with a growing economy and improving network of roads, we expect India to record growth of 10% and 5% in petrol and diesel consumption, respectively, over next 2-3 years.

Exhibit 2: Per capita petroleum consumption

Source: www.worldbymap.org, MOSL

Second largest road network in the world, but long way to go Although India has the second largest road network (5.23m km) in the world, a

comparison of international data shows that the country is way behind in terms of per capita road network.

Currently, more than 64.5% of all goods and 85.9% of all passenger traffic use the road network. The Ministry of Road and Transport estimates that freight/passenger traffic would increase at a CAGR of 7.8%/11% over 1951–2022.

Overall, rising urbanization, urban centers expansion and industrialization have been fuelling huge demand for roads in the country.

3463

450.6 174

867

1962 1719 1545 1422

746

US China India Brazil Japan Germany France Russia World

lit/yr

Increasing infrastructure to propel fuel consumption in

India

3 January 2017 7


Exhibit 3: Per capita road network

Source: National Transport Development Policy Committee, MOSL

Exhibit 4: Addition of national highways

Source: NHAI, MOSL

Exhibit 5: Strong growth in number of vehicles

Source: SIAM, MOSL

Exhibit 6: Rise in passenger traffic

Source: Five Year Plan, MOSL

Exhibit 7: Increase in road freight traffic

Source: IRaDe, MOSL

OMCs retain market share Driven by increasing demand for two wheelers, improving road connectivity and

declining fuel prices, petrol consumption continues to grow at a high pace. After double-digit growth over past two years, petrol consumption continued to grow at 11.7% over April-November 2016. IOCL has a market share of 43.4% in petrol, followed by BPCL (27.5%) and HPCL (25.7%). Non-OMCs have been able to take only ~3.4% market share so far post deregulation.

After +7.5% in FY16, diesel sales grew just 4.2% over April-November 2016. However, increasing activities in the construction, mining, logistics, cement,

573 899

288 336 323 149

693 728

260 498

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USA

km/100,000 population

0 1,51

4

179

4,81

9

158

2,86

9

1,90

2

609 23

,814

9,00

8

10,2

28 36

,500

1st

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9th

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12th

Length of national highway added under various five yr plans(km)

9.7 10.9 10.7 11.1 14.1

18.0 20.7 20.5 21.5 23.3 23.9

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Number of total vehicles in India (mn)

0

10,000

20,000

30,000

40,000

1950

-51

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-61

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-71

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-81

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-91

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Billion-passenger km (road)

0

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1950

-51

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Billion tonne km

3 January 2017 8


FMCG and consumer durables sectors are expected to lift diesel consumption. IOCL has a market share of 48.0% in diesel, followed by BPCL (25.9%) and HPCL (22.6%). Non-OMCs have been able to take only ~3.5% market share.

Exhibit 8: Consumption of petrol/diesel grew at 14.5%/7.5% in FY16

Source: PPAC, MOSL Low marketing margin to keep competition at bay Initial expectation post diesel deregulation in 2014 was that marketing margins

would expand. However, the OMCs have deliberately kept marketing margins low to prevent competition from non-OMCs.

We believe that marketing gross margins would increase only to take care of inflation in marketing cost and that net marketing margins would remain at current levels. However, the companies have been using marketing margins to adjust for large fluctuations in inventory valuations.

Average gross margin on diesel since April 2015 stands at INR2.6/liter, marginally higher than INR2.2/liter when diesel was regulated. Similarly, average gross margin on petrol since April 2015 stands at INR2.8/liter, higher than INR2.2/liter when petrol was regulated.

Exhibit 9: Gross marketing margins in check to prevent competition (INR/ltr)

Source: PPAC, MOSL

Fuel retail outlet economics challenging at low volumes At an all-India level, average monthly fuel volume stood at ~170KLPM and we

estimate RoIC of ~12% at these volumes. We note that the retail fuel economics will vary widely depending on location

and volumes and land price will play a major role in pace of expansion for new outlets.

0.0

5.0

10.0

15.0

20.0

-4.0

0.0

4.0

8.0

12.0

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

YTD

Diesel Petrol

0.01.02.03.04.05.06.07.0

0.0

1.0

2.0

3.0

4.0

5.0

Apr-

15

May

-15

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15

Jul-1

5

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15

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Mar

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Jun-

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Jul-1

6

Aug-

16

Sep-

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Oct

-16

Nov

-16

Dec-

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Jan-

17Petrol Diesel

Petrol consumption grows at 11.7% in FY17YTD; diesel

at 4.2%

3 January 2017 9


As the calculation suggests, it is imperative to have higher throughput at the fuel pump to make decent returns.

Exhibit 10: Excluding land costs, retail fuel pump economics get into not-so-attractive zone at lower volumes

in INR '000 Case 1 Case 2 Case 3 Case 4 Case 5 Comments

Volumes (KLPM) 100 125 150 175 200

Annual volumes ('000 ltr) 1,200 1,500 1,800 2,100 2,400

Average Marketing Margin (INR/ltr) 1.00 1.00 1.00 1.00 1.00 Avg. marketing margins for Petrol/Diesel

PBT 1,200 1,500 1,800 2,100 2,400

Income tax (@ 30%) 360 450 540 630 720

PAT 840 1,050 1,260 1,470 1,680

PAT (INR/ltr) 0.70 0.70 0.70 0.70 0.70

RoIC (excluding land cost) 14% 18% 21% 25% 28%

Investment 6,000 6,000 6,000 6,000 6,000 Investment could vary between INR50-60 lakh

Land 6,000 6,000 6,000 6,000 6,000 Assuming 12,000sq ft at rate of INR500/sq ft

RoIC (including land cost) 7% 9% 11% 12% 14%

Source: Company, MOSL

OMCs continue dominating marketing infrastructure We believe that low marketing margins would prevent any meaningful

competition. Non-OMCs continue to struggle on the retail side due to the lack of marketing

infrastructure. Reliance Industries has opened only 1,022 retail outlets and consistently delayed the opening of new outlets. British Petroleum has also been recently granted a license to open up to 3,500 retail outlets. Shell too has a license to open up to 2,000 retail outlets, but has been operating only 80 outlets. MRPL also has a license to open up to 500 retail outlets, but has not shown any progress. Essar Oil has also made minor inroads into fuel retailing. It remains to be seen what happens now with ownership change in the company.

Over the years, OMCs have developed large marketing and distribution infrastructure. Their assets are low-cost and depreciated. It will not be possible for any new company to match the profitability at existing marketing margins. However, Petroleum and Natural Gas Regulatory Board (PNGRB) has been mulling throwing open existing product pipelines of public sector companies for common carrier access. The public sector companies, however, have vehemently opposed this. If the product pipelines are thrown open, then the non-OMCs, with much lesser investment in rest of the infrastructure, can easily ramp up their marketing presence. For now, the OMCs continue to dominate the marketing infrastructure.

3 January 2017 10


Exhibit 11: 90% of the marketing terminals/depots belong to the OMCs (FY16)

Exhibit 12: 94% of the retail outlets belong to the OMCs (FY16)

Source: PPAC, MOSL

Exhibit 13: 77% of the pipelines belong to the OMCs (FY16)

Exhibit 14: 89% of the product pumping capacity belongs to the OMCs (FY16)

Source: PPAC, MOSL

Bhatinda refinery helps HPCL gain market share With its refineries located at Mumbai and Vizag HPCL, HPCL has traditionally

faced constrained product availability in the north. Limited presence in the north also adversely affected its ability to expand aggressively in western and central India.

However, in anticipation of product availability from its upcoming 9mmtpa Bhatinda refinery, it ramped up its presence across Rajasthan, Punjab and Haryana. Since these regions could now be serviced primarily from the Bhatinda refinery, it has unlocked the potential to ramp up sales in MP and Gujarat.

IOCL 38%

BPCL 25%

HPCL 26% RIL

5% Essar Oil 3% Shell 1%

Others 2%

IOCL 45%

BPCL 24%

HPCL 25%

RIL 2%

Essar Oil 4%

Shell 0%

IOCL 45%

BPCL 13% HPCL

20%

Others 22%

IOCL 41%

BPCL 15% HPCL

33%

Others 11%

3 January 2017 11


Exhibit 15: Retail outlets opened over FY11-16

Source: Ministry of Petroleum and Natural Gas, MOSL As a result of product availability due to the Bhatinda refinery, HPCL has

managed to take some market share from peers. Petrol consumption in the country grew at a CAGR of 9% over FY11-16. With a CAGR of 9.3% over FY11-16, HPCL surpassed industry growth despite the entry of private players.

3 January 2017 12


India’s diesel consumption CAGR stood at 4.4% over FY11-16. However, due to the strategic roll out of retail outlets in north, west and central India, HPCL recorded a CAGR of 6.1% over this period, almost 50% higher than the industry average.

Exhibit 16: Even at 10% private market share, expect the OMCs’ volume CAGR at 3-4% Petrol (mmt) FY11 FY12 FY13 FY14 FY15 FY16

Mkt sh. (%) Mkt sh (%) Mkt sh (%) Mkt sh (%) Mkt sh (%) Mkt sh (%)

IOCL 6.4 44.8 6.7 44.6 7.0 44.2 7.5 43.9 8.4 43.8 9.5 43.4

BPCL 3.9 27.6 4.2 27.7 4.4 28.2 4.8 28.1 5.4 28.0 6.0 27.5

HPCL 3.6 25.4 3.9 25.8 4.1 25.9 4.4 25.8 5.0 26.2 5.6 25.7

Total dom. sales 14.2 15.0 15.7 17.1 19.1 21.8

CAGR (%)

Total dom. sales

9.0%

IOCL

8.3%

BPCL

9.0%

HPCL 9.3%

Diesel (mmt)

IOCL 31.6 52.6 34.1 52.7 35.6 51.5 33.9 49.6 34.5 49.7 35.8 48.0

BPCL 14.6 24.3 16.3 25.2 18.0 26.1 18.3 26.8 18.4 26.5 19.4 25.9

HPCL 12.5 20.9 14.2 22.0 15.5 22.4 16.0 23.4 15.8 22.8 16.9 22.6

Total dom. sales 60.1 64.8 69.2 68.4 69.4 74.6

CAGR (%)

Total dom. sales

4.4%

IOCL

2.5%

BPCL

5.8%

HPCL 6.1%


Paradip to help IOCL gain market share in south from HPCL/BPCL For HPCL, the largest additions have been in AP/Telangana, Maharashtra,

Madhya Pradesh, Uttar Pradesh, Rajasthan and Gujarat. HPCL traditionally lacked products in the northern market and could not expand in west and central India as well. However, with products now available from the Bhatinda refinery, it has been able to increase penetration across Maharashtra, Madhya Pradesh and Uttar Pradesh.

BPCL has been focusing on Maharashtra. It has also been penetrating into AP/Telangana and Tamil Nadu to benefit from higher product availability led by Kochi expansion.

IOCL has presence in the south only through its subsidiary Chennai Petroleum. However, in anticipation of product availability from its upcoming Paradip refinery, it has been focusing on increasing penetration in AP/Telangana, Karnataka, Maharashtra and Tamil Nadu. As Paradip stabilizes, it would eat into the market share of BPCL and HPCL in the south, in our view.

3 January 2017 13


Exhibit 17: Retail outlets opened over FY11-16

Source: Ministry of Petroleum & Natural Gas, MOSL

IOCL

BPCL

HPCL

3 January 2017 14


High GRMs – a dance of Mayflies? IOCL and BPCL would improve GRM with new capex

We expect the global glut in refining to expand by 2.2mbopd over 2016-21. In the short term too, we expect the expiry of Chinese tax breaks on smaller vehicles, along with high petrol inventory and the end of driving season in the US, to dampen the benchmark cracks.

IOCL would increase its GRM with stabilization of its 15mmtpa Paradip refinery, despite a benign refining environment. BPCL is also expected to increase its GRM following the commissioning of its Kochi Integrated Refinery Expansion Project. HPCL is embarking on expansion and upgradation of its Vizag refinery, but this is expected to complete only by FY20.

Global glut to increase by 2.2m bopd OPEC estimates that 7.3m bopd of new distillation capacity would come up over

2016-21. In addition, debottlenecking would add 1m bopd of refining capacity. Closures would stand at 2.6m bopd. As against net capacity addition of 5.7m

bopd, demand is expected to grow by just 3.5m bopd. This should lead to a 2.2m bopd increase in the supply glut. Hence, we expect refining margins to remain under pressure.

Exhibit 18: Refinery capacity addition (million bopd)

US & Canada

Latin America

Africa Europe Russia & Caspian

Middle East

China Other APAC

World

2016 0.4 0 0 0 0 0.2 0.1 0 0.9 2017 0.1 0 0 0 0.1 0.2 0.3 0.4 1.1 2018 0.1 0.1 0 0.1 0.1 0.1 0.3 0.3 1.1 2019 0.1 0.1 0.1 0 0.1 0.5 0.5 0.3 1.7 2020 0 0.1 0.3 0 0 0.2 0.3 0.3 1.3 2021 0 0.1 0.2 0 0 0.5 0.3 0.2 1.4 2016–2021 0.8 0.4 0.6 0.2 0.3 1.7 1.8 1.5 7.3

Source: OPEC, MOSL

Expect correction in short term too China introduced a 50% tax break on purchase of smaller vehicles in October

2015 to boost its fledgling automotive industry. This had catapulted consumption of petrol (crack spread expanded to ~USD16-20/bbl) until the teapot refiners jumped into the fray and spoiled the party.

The tax break is valid only till December 2016. Expiry of the same is expected to adversely impact petrol crack spread. China still is battling with poor economic growth. Higher refinery utilizations have resulted in record exports of diesel and petrol from China.

3 January 2017 15


Exhibit 19: Export of diesel from China (tmt/month)

Source: Bloomberg, MOSL

Exhibit 20: Export of petrol from China (tmt/month)


Rising inventory of petrol in US to adversely impact cracks Additionally, in the short term, with the onset of winter, the driving season in

the US comes to an end. As the US is the largest consumer of petrol, this would also add to the decline in petrol crack spread in the short run.

Exhibit 21: High petrol inventory in the US


-1,500-1,000

-5000

5001,0001,5002,000

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Net export from China

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300

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Net export from China

24.0

18.0

20.5

23.0

25.5

28.0

30.5

Jan-

07

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No of days of supply Avg since 2007

Lack of domestic consumption growth and

restart of teapot refineries has boosted exports from

China

3 January 2017 16


Exhibit 22: Export of petrol from the US (mbopd)


OMCs improve their operating leverage Led by several process-efficiency projects, the OMCs have been able to increase

the distillate yield. IOCL has increased its yield by more than 5% over FY10-16. On the other hand, BPCL and HPCL have been able to raise their distillate yields by 7% and 4%, respectively. BPCL has been able to lower its fuel & loss by more than 1% over FY10-16, while both IOCL and HPCL have not shown much improvement in this regard.

Additionally, BPCL is completing the INR160b Integrated Refinery Expansion Project (IREP), which would increase its capacity from 9.5mmtpa to 15.5mmtpa by end-FY17. This is expected to increase its GRM by ~USD2/bbl.

HPCL is also implementing INR210b expansion at the Vizag refinery, which would increase its capacity from 8.3mmtpa to 15mmtpa. This project also includes bottom upgradation and is expected to increase GRM by ~USD2/bbl.

IOCL is stabilizing its INR350b, 15mmtpa greenfield Paradip refinery. With complexity of 12.2, it is one of the most complex refineries in India.

Exhibit 23: Improvement in distillate yield (%) - FY16

Exhibit 24: Improvement in fuel & loss (%) - FY16

Source: PPAC, MOSL

Paradip is a jewel in the crown for IOCL After much delay, IOCL’s flagship 15mmtpa Paradip project of INR350b has been

commissioned now. All units – primary, secondary and utilities – have been commissioned, and the refinery is currently running at 65-70% utilization.

Road, railway and coastal facilities are available for evacuation of products. As the refinery is located on the coast, it would help lower inventory volatility.

-1.0

-0.5

0.0

0.5

1.0

Jan-

00O

ct-0

0Ju

l-01

Apr-

02Ja

n-03

Oct

-03

Jul-0

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r-05

Jan-

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Jan-

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Petrol export

75.3

80.6 77.7

84.9

69.3

73.6

65.0

70.0

75.0

80.0

85.0

90.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

IOCL BPCL HPCL

8.2 8.7

5.9

4.8

7.2 7.7

4.0

5.5

7.0

8.5

10.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

IOCL BPCL HPCL

Continuously working towards improving

efficiencies

3 January 2017 17


With Nelson Complexity Index of 12.2, the Paradip refinery is one of the most complex refineries in India. It has a petrol yield of 25%, the highest among Indian refineries.

Currently, petrol is the most profitable refinery product. The company is also constructing a polypropylene project at Paradip, which would be completed by late 2018. This will further boost profitability of the company.

Exhibit 25: Crude slate for Paradip

Crude slate % API gravity (deg)

Ras Gharib 6.7 22

Marlim 10 19.6

Basrah Light 33.3 30.5

Kuwait 33.3 30.2

Soorosh 6.7 19

Oriente 10 24.1

Total 100 27.3

Exhibit 26: Product yield for Paradip (%)

Propylene 1.3

LPG 3.9

Naphtha 0

MS 25.3

SK/ATF 13.1

HSD 37.5

Sulphur 1.8

Pet coke 8.1

Fuel & loss 9

Total 100


We expect the refinery to ramp up to 100% by end-FY17. In our view, at full

capacity utilization, the refinery itself would generate INR43b of EBITDA for the company.

Exhibit 27: Profitability of Paradip refinery

FY18E

Throughput (mmt) 15 GRM (USD/bbl) 8.5 Opex (USD/bbl) 2.5 EBITDA (INR mn) 42,900

Source: MOSL

BPCL to get boost from Kochi IREP BPCL is completing its INR160b IREP at Kochi. The project involves replacing

CDU-1 of 4.5mmtpa with a new CDU of 10.5mmtpa, which would increase the refining capacity of Kochi from 9.5mmtpa to 15.5mmtpa.

As part of the expansion, it is also adding a delayed coker, FCCU, VGO hydro treater, diesel hydro treater, sulfur recovery unit, hydrogen generation unit and related utilities, which will increase the complexity of the whole complex to 9.5.

This is expected to boost GRM of the Kochi refinery by USD1.5-2/bbl. The project also envisages production of propylene for the upcoming petrochemical complex.

3 January 2017 18


HPCL catching up with Vizag expansion, although 3-4 years away HPCL has embarked on INR210b Vizag expansion, which will increase the

capacity of the Vizag refinery from 8.3mmtpa to 15mmtpa. For this, it would have to incur heavy capex of ~INR100b/year over FY18-20,

inclusive of the other smaller projects. We are also concerned about the technology being used. The expansion uses a technology called slurry hydrocracker, which has been implemented at very few places globally.

High capex in the project would also stress its balance sheet, compared to IOCL and BPCL which are coming to an end of their major capex projects.

3 January 2017 19


The big gets bigger! OMCs trading cheaper than global peers; IOCL is our top pick

Global peers are trading at 10.7x FY18E EPS and 6.8x FY18E EBITDA. In comparison, IOCL is trading at 8.6x FY18E EPS and 6.1x FY18E EBITDA, BPCL at 11.6x FY18E EPS and 7.7x FY18E EBITDA, and HPCL at 10.3x FY18E EPS and 7.8x FY18E EBITDA. Global peers have an RoE of 13.0%, while the OMCs have 19.9%.

Deregulation, first-mover advantage and a growing market put the OMCs in a sweet spot as long as crude oil prices do not go through the roof.

We value the OMCs using SOTP. We value various segments at EV/EBITDA and add investments to arrive at a TP of INR464 for IOCL, INR756 for BPCL and INR543 for HPCL. IOCL is our top pick.

Global valuations suggest deep value for OMCs For FY18, average P/E for global peers, excluding Indian companies, stands at

10.7x and average EV/EBITDA at 6.8x. Indian companies have a much higher RoE of 20% (FY18) compared to 13% for global peers.

Exhibit 28: Valuation of global peers

RoE (%) EV/EBITDA PBV (x) PE (x)

FY17/CY16 FY18/CY17 FY17/CY16 FY18/CY17 FY17/CY16 FY18/CY17 FY17/CY16 FY18/CY17

Caltex Australia 19.8 19.6 7.8 7.6 2.5 2.3 13.7 12.8 Petron Corp 10.6 12.9 7.1 6.7 1.2 1.1 11.1 8.1 Showa Shell Sekiyu KK 12.6 12.4 6.3 6.3 1.7 1.6 13.1 11.4 Esso Thailand PCL 17.5 19.9 9.1 8.5 2.0 1.7 10.5 9.7 JX Holdings Inc 7.4 8.2 8.9 8.9 0.8 0.7 11.7 9.3 TonenGeneral Sekiyu KK 12.1 12.0 6.4 6.1 1.6 1.5 10.7 11.8 Thai Oil PCL 14.1 12.9 6.0 6.1 1.3 1.2 9.8 9.9 S-Oil Corp 17.5 16.7 7.3 6.5 1.4 1.2 8.5 7.8 Idemitsu Kosan Co 11.1 9.9 7.6 6.7 0.8 0.7 7.8 6.8 SK Innovation Co Ltd 10.5 9.8 4.4 4.4 0.8 0.7 7.5 7.4 Phillips 66 12.0 12.6 8.6 8.0 1.9 1.8 15.8 13.7 Marathon Petroleum Corp 10.1 10.0 7.7 7.4 1.8 1.9 14.4 13.3 Valero Energy Corp 12.7 13.5 5.6 5.4 1.4 1.4 12.0 10.9 Western Refining Inc 10.8 13.6 8.2 7.3 2.2 2.1 21.8 14.1 Tesoro Corp 12.0 11.5 6.3 5.7 1.7 1.7 14.4 12.9 Indian Oil Corp 18.1 16.5 5.6 5.5 1.8 1.6 9.2 9.0 Bharat Petroleum Corp 24.7 23.2 7.9 6.8 2.7 2.4 12.1 10.9 Hindustan Petroleum Corp 22.5 20.2 5.2 5.1 2.1 1.9 9.9 9.8 Reliance Industries 11.8 11.5 8.2 7.1 1.2 1.1 10.7 9.7 MRPL 31.1 24.5 5.3 5.1 2.3 1.9 8.0 8.1 Chennai Petroleum Corp 28.5 21.5 5.2 5.2 1.2 1.0 4.5 4.7 Avg excl. Indian cos 12.7 13.0 7.2 6.8 1.5 1.4 12.2 10.7


Incorporating operational excellence in valuation During FY10-16, BPCL’s GRM has been the best among the OMCs. The INR160bn

IREP project is also going to improve its GRM. Hence, we use EV/EBITDA of 5x for IOCL and HPCL and 5.5x for BPCL.

3 January 2017 20


For retail fuel sales, throughput per month stands at 185kl for BPCL and much lower 160kl for HPCL and 155kl for IOCL. Additionally, bulk diesel accounts for 8-9% of diesel sales of BPCL and HPCL but 16-18% for IOCL. HPCL has higher profitability in marketing because of its lube business. As a result, we value marketing segment of IOC at 7.5x and 8x for HPCL and BPCL.

Exhibit 29: Refining margins of OMCs - GRM (USD/bbl)

FY10 FY11 FY12 FY13 FY14 FY15 FY16

IOCL 5.3 6.0 3.6 2.3 4.2 0.3 5.1

BPCL 3.0 4.5 2.3 5.0 4.3 3.6 6.6

HPCL 2.7 5.3 2.9 2.1 3.4 2.8 6.7

SG GRM 3.6 5.2 8.3 7.9 5.6 6.4 7.5


Exhibit 30: Throughput per retail outlet


IOCL is our top pick For IOCL, we estimate EBITDA growth of 66% and PAT growth of ~102% over

FY16-19. RoE is expected to rise from 14.2% in FY16 to ~20% in FY18-19. The stock is trading at 8.3x FY19E EPS and 5.7x FY19E EBITDA. We value its

refining, petrochem and others segment at 5x FY19E EBITDA, and marketing and pipeline at 7.5x FY19E EBITDA. We further add investments to arrive at a target price of INR464. We have a Buy rating on IOCL.

Exhibit 31: Assumptions 2015 2016 2017E 2018E 2019E

Exchange Rate (INR/USD) 61.4 65.5 67.4 70.0 72.0 Brent Crude (USD/bbl) 86 48 49 60 60 Market Sales Volume of refined products (MMT) 73 77 77 79 82

YoY Change (%) 2% 6% -1% 3% 4% GRM (USD/bbl)

IOCL GRM (USD/bbl) 0.3 5.1 6.2 5.8 5.8 Reuters Singapore GRM 6.4 7.5 5.2 5.4 5.4 Prem/(disc) (6.1) (2.4) 0.9 0.4 0.4

Refining capacity (mmt) 54.2 54.2 69.2 69.2 69.2 Utilization (%) 98.9 104.6 88.4 103.6 103.6 Refinery throughput (mmt) 53.6 56.7 61.2 71.7 71.7

YoY (%) 0.9 5.8 7.9 17.2 0.0 Pipeline throughput (mmt) 75.7 79.8 84.4 85.9 86.9

YoY (%)

3% 5% 6% 2%

Blended Gross Marketing Margin excld inventory (INR/ltr) 4.8 3.5 3.7 4.1 4.1 Under recoveries Sharing (INRb)

Gross under recoveries (INRb) 1,523 78 56 51 55 Upstream sharing 833 9 - - - Govt. sharing 644 69 56 51 55

Net sharing (INRb) 46 0 - - - Net sharing (%) 3% 0% 0% 0% 0%

155

185

160

IOCL BPCL HPCL

kl/month

3 January 2017 21


Exhibit 32: Breakdown of standalone EBITDA

2015 2016 2017E 2018E 2019E

Refining (70,080) 55,800 145,913 116,921 121,883 Marketing 84,950 50,230 105,148 110,101 114,943 Pipeline 54,900 58,870 62,582 66,741 70,894 Petchem 34,200 60,790 66,969 50,750 52,200 Others 38,940 (2,410) 14,053 14,074 15,184 Total 142,910 223,280 394,664 358,588 375,104


Exhibit 33: Valuation Valuation EBITDA (INR m) EV/EBITDA (x) EV (INR m) Refining 121,883 5.0 609,416 Marketing 114,943 7.5 862,073 Pipeline 70,894 7.5 531,706 Petrochem 52,200 5.0 261,000 Others 15,184 5.0 75,918 Total 2,340,113 Net debt (FY18) 483,088 Oil bonds 113,707 Net debt excluding oil bonds 369,380 Standalone valuation 1,970,732 Value per share 415 Stake in Chennai Petro 3 Stake in Lanka IOC 2 Stake in Petronet 6 Stake in ONGC 34 Stake in GAIL 2 Stake in Oil India 1 Total value 464


BPCL would benefit from its Kochi expansion We estimate EBITDA and PAT growth of 8% and 9%, respectively, over FY16-19.

RoE is expected to decline from 32% in FY16 to 21% in FY19. The stock is trading at 10.9x FY19E EPS and 7.3x FY19E EBITDA. We value

refining segment at 5.5x, marketing segment at 8.0x, pipeline segment at 7.5x FY19E EBITDA, and add investments to arrive at a target price of INR756. We have a Buy rating on the company.

Exhibit 34: Assumptions Particulars 2015 2016 2017E 2018E 2019E

Exchange Rate (INR/USD) 61 65 67 70 72 Brent Crude (USD/bbl) 86 48 49 60 60 Market Sales Volume of refined products (MMT) 34 37 38 40 41

YoY Change(%) 1% 6% 3% 5% 4% GRM (USD/bbl)

BPCL GRM (USD/bbl) 3.6 6.6 5.7 6.2 6.2 Reuters Singapore GRM 6.4 7.5 5.5 5.4 5.4 Prem/(disc) (3) (1) 0 1 1

Refining capacity (mmt) 21.5 21.5 24.5 27.5 27.5 Utilization (%) 0% 0% 14% 12% 0% Refinery throughput (mmt) 109% 112% 107% 108% 109%

YoY (%) 0% 3% 8% 14% 1%

3 January 2017 22


Particulars 2015 2016 2017E 2018E 2019E

Pipeline throughput (mmt) 11.6 11.6 11.6 11.6 11.6 YoY (%) 0% 0% 0% 0% 0%

Blended Gorss Marketing Margin excld inventory (INR/ltr) 5.0 4.4 3.3 3.3 3.3 Gross under recoveries 161 18 10 12 13 Upstream sharing 84 2 - - - Govt. sharing 73 16 10 12 13 Net sharing (INRb) 5 - - - - Net sharing (%) 3% 0% 0% 0% 0%

Source: MOSL

Exhibit 35: Valuation

Valuation EBITDA (INR m) EV/EBITDA (x) Value (INR m) Refining 63,454 5.5 348,997 Marketing 56,643 8.0 453,143 Pipeline 9,464 7.5 70,979 Others 2,495 5.0 12,475 Total 885,594 Net debt 131,285 Oil bonds 40,088 Net debt excluding oil bonds 91,197 Valuation of standalone 549 Stake in IGL (INR) 16 Stake in Petronet (INR) 0 Stake in Oil India (INR) 3 Stake in Numaligarh (INR) 25 Stake in Bina (INR) 3 Others (INR) 35 BM-C-30 (INR) 3 BM-SEAL-11 (INR) 46 Rovuma Basin (INR) 76 Total value (INR) 756


3 January 2017 23


HPCL going into capex mode HPCL is embarking upon its flagship INR210b capex, which would strain its

balance sheet. We expect net debt of the company to rise from INR145b in FY16 to INR299b in FY19E.

The stock is trading at 10.1x FY19E EPS and 7.7x FY19E EBITDA. We value refining segment at 5.0x, marketing at 8x, pipeline at 7.5x FY19E EBITDA, and add investments to arrive at a target price of INR543 for the stock. We have a Buy rating.

Exhibit 36: Assumptions 2015 2016 2017E 2018E 2019E

Exchange Rate (INR/USD) 61 65 67 70 72 Brent Crude (USD/bbl) 86 47 49 60 60 Market Sales Volume of refined products (MMT) 32 34 35 37 38

YoY Change (%) 3 7 2 6 4

GRM (USD/bbl) HPCL GRM (USD/bbl) 2.8 6.7 5.3 5.0 5.0 Reuters Singapore GRM 6.4 7.5 6 5 5 Prem/(disc) (4) (1) (0) (0) (0)

Total Refinery throughput (MMT) 16.2 17.2 16.5 16.0 16.0 YoY (%) 4% 6% -4% -3% 0% Refining capacity utilization (%) 109% 116% 112% 108% 108% Blended marketing margin excld inventory (INR/lit) 4.5 4.2 4.0 4.2 4.2

Under recoveries Sharing (INRb)

Gross under recoveries 164 20 11 14 15 Upstream sharing 109 2 - - - Govt. sharing 51 18 11 14 15 Net sharing 5 0 - - - Net sharing (%) 3% 0% 0% 0% 0%



Valuation EBITDA (INR m) EV/EBITDA (x) Valuation (INR m) Refining 25,658 5 128,288 Marketing 56,784 8 454,272 Pipeline 13,213 7.5 99,100 Others 3,861 5 19,307 Total 700,968 Net debt (FY18) 264,141 Oil bonds 49,857 Net debt excluding oil bonds (FY18) 214,285 Standalone valuation 486,683 Value per share (INR) 479 Stake in MRPL (INR) 31 Stake in Oil India (INR) 2 Stake in HMEL (INR) 31 Total value (INR) 543


3 January 2017 24


Key risks Sharing of marketing infrastructure may spell doom!

A rise in oil prices beyond USD60-65/bbl may bring deregulation of petrol, diesel and ongoing reforms on kero/LPG under pressure.

Common carrier access to the product pipelines and other marketing infrastructure of the OMCs could lead to much faster penetration of non-OMCs into fuel retailing.

The government has been pushing the OMCs to start capex on various projects. This may result in capital misallocation.

Common carrier access could spell doom The Petroleum and Natural Gas Regulatory Board (PNGRB) last year issued a

notice to declare the petroleum and petroleum product pipelines of the OMCs as common carrier/contract carrier pipelines to allow third-party access for transportation of fuel.

The move would provide the private firms (like Reliance Industries and Essar Oil) with rights to move products on the pipeline network, threatening the market leadership positions of the OMCs.

The lower utilization level at some of the pipelines raises the threat for the OMCs. However, under the provision of PNGRB Act of 2006, pipelines are not ‘common carriers’ and the regulator's authority with respect to pipelines that are not covered within the definition of common carrier is limited.

Exhibit 38: Petroleum product pipelines have ~75% utilization

Source: MOSL

69%

136%

108%

129%

73% 70% 80%

53% 62%

93%

67% 83%

72% 76%

113%

23%

48%

100%

40% 29%

102%

81%

58%

96%

73%

30%

63%

112%

66% 57%

33%

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IOC HPCL BPCL

Utilization (%) Average

3 January 2017 25


Indian Oil Corporation Deep value to offset decline in benchmark cracks

Stabilization of the newly commissioned INR350b, 15mmtpa Paradip refinery will add EBITDA of INR43b from FY18.

It is the most diversified OMC, with EBITDA contribution of 32% from refining, 31% from marketing, 14% from petrochem and 19% from pipeline.

With the completion of the Paradip refinery, we expect the company to generate free cash flow of INR47/share over FY17-19.

Refining to get boost from Paradip Paradip refinery is currently running at 65-70% utilization. We expect it to ramp

up to 90% by early 2017 and to full utilization in FY18. We expect USD8.5/bbl of GRM from Paradip, which would result in USD5.8/bbl of GRM for the company over FY17-19.

We expect refining EBITDA to increase from INR56b in FY16 to INR121b in FY19. The company is implementing a fuel upgradation project of INR110b. Apart from that, we do not see significant capex in the refining segment over next two years.

Marketing to contribute INR115b by FY19 Over past few years, IOCL has lost market share due to increased availability of

products to HPCL from the newly commissioned Bhatinda refinery. We expect commissioning of the Paradip refinery to help IOCL gain market share in the south. In a conservative case, even if IOCL continues to grow at industry rate, we expect marketing EBITDA of INR115b in FY19.

The lower utilization level at some of the pipelines raises the threat for the OMCs. However, the company has been protesting and we do not see any threat in next 2-3 years.

Pipeline is a steady business IOCL operates the largest network of product pipelines in the country with total

network of 6,700km and capacity of 40mmtpa. We expect EBITDA of INR71b by FY19.

The company is also working on Paradip-Raipur-Ranchi pipeline, Paradip-Hyderabad pipeline and capacity augmentation of Salaya-Mathura pipeline, which would further boost its pipeline EBITDA.

Valuation and recommendation Global peers are trading at 10.7x FY18E EPS and 6.8x FY18E EBITDA. We value

IOCL using SOTP. Refining, petrochem and other segments are valued at 5x FY19E EBITDA, while marketing and pipeline segments are valued at 7.5x FY19E EBITDA. We have a Buy rating on the company with a target price of INR464.

3 January 2017 26


Story in charts

Exhibit 39: Refining throughput of IOCL


Exhibit 40: GRM trend of IOCL


Exhibit 41: Marketing sales volume


Exhibit 42: Pipeline throughput


Exhibit 43: Return rations (consolidated)


Exhibit 44: Debt and interest burden (consolidated)


54.7 53.1 53.6 56.7 62.3

71.7 71.7

FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Refinery throughput (mmt)

2.3

5.8

7.9

5.4

0.0

2.5

5.0

7.5

10.0


IOCL GRM (USD/bbl) Reuters Singapore GRM (USD/bbl)

68.2

81.7

0.1

4.0

-3

0

3

5

8

0

25

50

75

100


Market Sales Volume (mmt) YoY (%)

76

87

3.10

1.16

-5

-3

0

3

5

8

65

70

75

80

85

90


Pipeline throughput (mmt) YoY (%)

7.2

27.1

19.6

6.6

18.5 14.6

0

8

16

24

32


RoE RoCE

855,696

524,038

70,835

35,147

0

20,000

40,000

60,000

80,000

0

200,000

400,000

600,000

800,000

1,000,000


Net Debt (INRm) Interest (INRm)

3 January 2017 27


Exhibit 45: EBITDA growth and margins (consolidated)


Exhibit 46: PAT growth and margins (consolidated)


Exhibit 47: P/E valuation chart


Exhibit 48: EV/EBITDA valuation charts


Exhibit 49: Valuation Valuation EBITDA (INR m) EV/EBITDA (x) EV (INR m) Refining 121,883 5.0 609,416 Marketing 114,943 7.5 862,073 Pipeline 70,894 7.5 531,706 Petrochem 52,200 5.0 261,000 Others 15,184 5.0 75,918 Total 2,340,113 Net debt (FY18) 483,088 Oil bonds 113,707 Net debt excluding oil bonds 369,380 Standalone valuation 1,970,732 Value per share 415 Stake in Chennai Petro 3 Stake in Lanka IOC 2 Stake in Petronet 6 Stake in ONGC 34 Stake in GAIL 2 Stake in Oil India 1 Total value 464


-38.8

119.8

4.6 3.0

8.4

0

3

6

9

12

-50

0

50

100

150


EBITDA YoY (%) EBITDA Margins (%)

5.28 4.56

0.96

4.57

0

2

4

6

8

-50

0

50

100

150


PAT YoY (%) PAT Margin (%)

7.5

24.3

10.2

4.4 0

8

16

24

32

Dec-

06

Mar

-08

Jun-

09

Sep-

10

Dec-

11

Mar

-13

Jun-

14

Sep-

15

Dec-

16PE (x) Peak(x) Avg(x) Min(x)

3.5

10.6

5.8

1.9

1

4

7

10

13

Dec-

01

Feb-

03

Apr-

04

Jun-

05

Aug-

06

Oct

-07

Nov

-08

Jan-

10

Mar

-11

May

-12

Jul-1

3

Aug-

14

Oct

-15

Dec-

16

EV/EBDITA(x) Peak(x) Avg(x) Min(x)

3 January 2017 28


Financials and Valuations

Consolidated - Income Statement (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Total Income from Operations 4,607,497 4,872,595 4,483,152 3,544,253 3,574,315 4,202,846 4,547,309 Change (%) 13.1 5.8 -8.0 -20.9 0.8 17.6 8.2 Raw Materials 4,146,106 4,328,076 3,991,213 2,792,252 2,781,578 3,419,136 3,736,402 Other Operating Costs 334,015 384,808 398,514 535,047 397,536 416,090 426,565 Total Expenditure 4,480,120 4,712,884 4,389,727 3,327,299 3,179,114 3,835,226 4,162,967

% of Sales 97.2 96.7 97.9 93.9 88.9 91.3 91.5 EBITDA 127,377 159,711 93,424 216,954 395,201 367,620 384,342 Margin (%) 2.8 3.3 2.1 6.1 11.1 8.7 8.5 Depreciation 56,915 63,600 52,190 59,185 71,026 74,597 77,955 EBIT 70,462 96,111 41,234 157,769 324,175 293,023 306,386 Int. and Finance Charges 70,835 59,079 41,746 36,300 30,881 35,147 35,529 Other Income 45,416 45,278 53,975 37,474 38,184 37,236 37,396 PBT bef. EO Exp. 45,042 82,310 53,463 158,943 331,478 295,113 308,254 EO Items 0 17,468 16,681 13,643 0 0 0 PBT after EO Exp. 45,042 99,778 70,143 172,585 331,478 295,113 308,254 Total Tax 8,770 30,113 21,426 56,528 88,161 96,764 101,052 Tax Rate (%) 19.5 30.2 30.5 32.8 26.6 32.8 32.8 Minority Interest -8,217 -1,190 -402 3,865 3,865 3,865 3,865 Reported PAT 44,490 70,856 49,120 112,192 239,453 194,484 203,337 Adjusted PAT 44,490 53,388 32,439 98,550 239,453 194,484 203,337 Change (%) -62.7 20.0 -39.2 203.8 143.0 -18.8 4.6 Margin (%) 1.0 1.1 0.7 2.8 6.7 4.6 4.5 Consolidated - Balance Sheet (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Equity Share Capital 48,559 48,559 48,559 48,559 48,559 48,559 48,559 Total Reserves 581,813 630,571 639,764 711,381 824,494 947,755 1,069,639 Net Worth 630,372 679,130 688,323 759,940 873,053 996,314 1,118,198 Minority Interest 12,618 11,706 10,733 14,143 18,008 21,873 22,718 Total Loans 867,894 889,325 581,541 508,496 540,000 580,000 540,000 Deferred Tax Liabilities 63,323 64,228 68,356 96,158 122,734 125,624 128,355 Capital Employed 1,574,207 1,644,389 1,348,952 1,378,737 1,553,795 1,723,811 1,809,271 Gross Block 1,151,002 1,269,522 1,375,223 1,725,303 2,001,377 2,193,591 2,360,034 Less: Accum. Deprn. 484,133 544,856 608,119 667,304 738,330 812,927 890,883 Net Fixed Assets 666,869 724,666 767,104 1,058,000 1,263,046 1,380,664 1,469,151 Goodwill on Consolidation 870 878 705 791 791 791 791 Capital WIP 272,400 380,609 403,781 226,342 140,268 108,054 101,611 Total Investments 173,508 158,950 160,687 156,776 161,445 161,445 161,445 Curr. Assets, Loans&Adv. 1,303,597 1,401,345 1,004,677 977,928 1,072,628 1,177,608 1,222,279 Inventory 666,043 723,394 499,174 420,947 531,579 619,641 651,240 Account Receivables 125,021 125,517 76,448 86,604 89,448 101,694 106,069 Cash and Bank Balance 12,198 37,045 12,211 20,137 22,854 27,151 35,469 Loans and Advances 500,336 515,389 416,845 450,241 428,747 429,122 429,501 Curr. Liability & Prov. 843,037 1,022,058 988,001 1,041,100 1,084,384 1,104,751 1,146,006 Account Payables 619,702 751,018 707,229 720,006 760,374 785,741 826,996 Provisions 223,335 271,040 280,773 321,094 324,010 319,010 319,010 Net Current Assets 460,560 379,287 16,676 -63,172 -11,756 72,857 76,273 Appl. of Funds 1,574,207 1,644,389 1,348,952 1,378,737 1,553,795 1,723,811 1,809,271 E: MOSL Estimates

3 January 2017 29



Ratios

Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Basic (INR) EPS 9.2 11.0 6.7 20.3 49.3 40.1 41.9 Cash EPS 20.9 24.1 17.4 32.5 63.9 55.4 57.9 BV/Share 129.8 139.9 141.7 156.5 179.8 205.2 230.3 DPS 6.1 8.5 3.3 7.0 14.5 11.9 12.4 Payout (%) 77.4 68.2 39.3 36.4 34.5 34.7 34.6 Valuation (x) P/E 51.8 17.0 7.0 8.6 8.3 Cash P/E 19.9 10.7 5.4 6.2 6.0 P/BV 2.4 2.2 1.9 1.7 1.5 EV/Sales 0.5 0.6 0.6 0.5 0.5 EV/EBITDA 24.1 10.0 5.6 6.1 5.7 Dividend Yield (%) 1.0 2.0 4.2 3.4 3.6 FCF per share 67.4 23.5 20.3 6.5 26.6 Return Ratios (%) RoE 7.2 8.2 4.7 13.6 29.3 20.8 19.2 RoCE 6.4 6.4 4.7 10.3 19.8 14.9 14.3 RoIC 5.0 6.1 3.1 12.1 21.6 14.8 14.0 Working Capital Ratios Fixed Asset Turnover (x) 4.0 3.8 3.3 2.1 1.8 1.9 1.9 Asset Turnover (x) 2.9 3.0 3.3 2.6 2.3 2.4 2.5 Inventory (Days) 53 54 41 43 54 54 52 Debtor (Days) 10 9 6 9 9 9 9 Creditor (Days) 49 56 58 74 78 68 66 Leverage Ratio (x) Current Ratio 1.5 1.4 1.0 0.9 1.0 1.1 1.1 Interest Cover Ratio 1.0 1.6 1.0 4.3 10.5 8.3 8.6 Net Debt/Equity 1.1 1.0 0.6 0.4 0.4 0.4 0.3 Consolidated - Cash Flow Statement (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E OP/(Loss) before Tax 45,043 99,779 70,144 172,586 331,478 295,113 308,254 Depreciation 56,915 63,600 52,190 59,185 71,026 74,597 77,955 Direct Taxes Paid -8,770 -30,113 -19,781 -56,528 -88,161 -96,764 -101,052 (Inc)/Dec in WC -4,001 105,788 338,116 87,773 -48,698 -80,316 4,902 CF from Operations 89,187 239,054 440,669 263,016 265,646 192,631 290,059 Others 11,851 2,428 4,191 23,937 22,711 -975 -1,134 CF from Operating incl EO 101,038 241,481 444,860 286,953 288,357 191,656 288,925 (Inc)/Dec in FA -195,878 -229,606 -117,801 -172,641 -190,000 -160,000 -160,000 Free Cash Flow -94,841 11,876 327,059 114,312 98,357 31,656 128,925 (Pur)/Sale of Investments 1,746 14,549 -1,564 3,825 -4,669 0 0 CF from Investments -194,132 -215,056 -119,365 -168,816 -194,669 -160,000 -160,000 Issue of Shares 0 0 0 0 0 0 0 Inc/(Dec) in Debt 121,746 21,431 -307,784 -73,045 31,504 40,000 -40,000 Dividend Paid -34,415 -41,277 -16,020 -33,990 -70,636 -57,647 -60,218 Others 9,743 18,268 -26,525 -3,176 -51,838 -9,711 -20,389 CF from Fin. Activity 97,074 -1,579 -350,329 -110,211 -90,971 -27,358 -120,608 Inc/Dec of Cash 3,979 24,846 -24,834 7,926 2,717 4,297 8,317 Opening Balance 8,219 12,198 37,044 12,211 20,137 22,854 27,151 Closing Balance 12,198 37,044 12,211 20,137 22,854 27,151 35,468

3 January 2017 30


Bharat Petroleum Kochi to add value, but E&P remains a concern

The INR160b Kochi refinery is expected to be commissioned by early 2017. While it will increase GRM by USD1.5-2/bbl, we expect stabilization issues to mar its performance in FY18.

With low oil and LNG prices, we do not expect much progress on its projects in Brazil and Mozambique.

We value the company using SOTP at INR756.

Refining to get boost from Kochi Kochi IREP expansion is expected to complete by early 2017. We expect it to be

stabilized in mid-FY18. This should increase the Kochi refinery’s GRM by USD1.5-2/bbl. However, stabilization is expected to affect performance adversely in FY18, as witnessed during commissioning of recent refinery projects in India.

We expect refining EBITDA to increase from INR53b in FY16 to INR64b in FY19. Apart from INR40-50b on fuel upgradation, we do not see significant capex in the refining segment over next 2-3 years.

Marketing to add INR57b of EBITDA in FY19 BPCL has been strengthening its marketing infrastructure in the south to take

advantage of higher product availability from Kochi expansion. The expansion would help the company to take market share from HPCL in the south over next 2-3 years.

We expect marketing EBITDA of INR57b in FY19. We expect INR40-50b of capex per year in marketing and pipeline infrastructure.

E&P remains a concern With low LNG prices, we have seen continuous delays in Final Investment

Decision (FID) in Mozambique. The company guides for FID closure in 2017 now. In light of the new capacities coming up, LNG prices are expected to remain low, which would have an adverse impact on profitability of the block.

Petrobras is the operator of fields in Brazil where BPCL has stakes. Petrobras’ priority has been to come out of the recent corruption charges and improve its corporate governance. Additionally, since debt is high, the priority is on blocks that are either producing or ready to produce. BPCL’s participation is in blocks that are in early stages of exploration and unlikely to commence production by 2020.

Valuation and recommendation Global peers are trading at 10.7x FY18E EPS and 6.8x FY18E EBITDA. We value

BPCL’s refining segment at 5.5x, marketing at 8.0x, pipeline segment at 7.5x, and add investments to arrive at a target price of INR756. We have a Buy rating on the stock.

3 January 2017 31


Story in charts

Exhibit 50: Refining throughput of BPCL


Exhibit 51: GRM trend of BPCL






Exhibit 54: Return rations


Exhibit 55: Debt and interest burden


23.2 23.4 23.4 24.1 26.1

29.7 30.0


Refinery Throughput (mmt)

5.0

6.2 5.6

5.4

3.0

4.0

5.0

6.0

7.0

8.0


BPCL GRM (USD/bbl) Reuters Singapore GRM (US$/bbl)

36.5

43.1 5.3

3.8

-3

0

3

5

8

33

35

38

40

43

45


Marketing sales volume (mmt) YoY (%)

0.0

0.3

0.5

0.8

1.0

5

7

9

10

12


Pipeline Throughput (mmt) YoY (%)

16.8 20.6

10.9

15.0

0

10

20

30

40


RoE ROCE

212,379

102,399

18,252 7,500

0

50,000

100,000

150,000

200,000

250,000


Net debt (INRm) Interest

3 January 2017 32


Exhibit 56: EBITDA growth and margins


Exhibit 57: PAT growth and margins







Valuation EBITDA (INR m) EV/EBITDA (x) Value (INR m) Refining 63,454 5.5 348,997 Marketing 56,643 8.0 453,143 Pipeline 9,464 7.5 70,979 Others 2,495 5.0 12,475 Total 885,594 Net debt 131,285 Oil bonds 40,088 Net debt excluding oil bonds 91,197 Valuation of standalone 549 Stake in IGL (INR) 16 Stake in Petronet (INR) 0 Stake in Oil India (INR) 3 Stake in Numaligarh (INR) 25 Stake in Bina (INR) 3 Others (INR) 35 BM-C-30 (INR) 3 BM-SEAL-11 (INR) 46 Rovuma Basin (INR) 76 Total value (INR) 756


30.0

4.0

2.9 5.6

-15

0

15

30

45



101.6

6.5

1.1

3.8

0

1

3

4

5

0

30

60

90

120


PAT YoY (%) PAT Margins (%)

9.2

28.3

11.4

4.6 3

11

19

27

35

Dec-

06

Mar

-08

Jun-

09

Sep-

10

Dec-

11

Mar

-13

Jun-

14

Sep-

15

Dec-


4.2

10.0

5.1

1.5 1

4

7

10

13

Dec-

01

Feb-

03

Apr-

04

Jun-

05

Aug-

06

Oct

-07

Nov

-08

Jan-

10

Mar

-11

May

-12

Jul-1

3

Aug-

14

Oct

-15

Dec-

16


3 January 2017 33



Consolidated - Income Statement (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Total Income from Operations 2,421,810 2,644,066 2,424,188 1,884,479 1,843,983 2,182,278 2,275,053 Change (%) 14.2 9.2 -8.3 -22.3 -2.1 18.3 4.3 RM & Other Expenses 1,191,085 1,320,642 1,153,180 739,419 786,748 1,119,298 1,152,340 Finished Gds Purchase 1,023,115 1,070,857 938,728 774,855 754,109 741,307 792,949 Other Oper. Expenses 140,888 158,977 236,301 228,112 160,998 171,318 175,374 Total Expenditure 2,355,088 2,550,477 2,328,209 1,742,385 1,701,855 2,031,922 2,120,663

% of Sales 97.2 96.5 96.0 92.5 92.3 93.1 93.2 EBITDA 66,722 93,590 95,978 142,093 142,128 150,356 154,390 Margin (%) 2.8 3.5 4.0 7.5 7.7 6.9 6.8 Depreciation 24,627 26,109 30,267 24,286 24,147 27,173 27,016 EBIT 42,095 67,480 65,712 117,807 117,981 123,184 127,374 Int. and Finance Charges 25,183 19,821 11,805 11,321 9,820 12,078 11,881 Other Income 15,290 13,998 22,998 19,453 23,125 25,212 28,168 PBT bef. EO Exp. 32,202 61,657 76,905 125,939 131,287 136,317 143,661 PBT after EO Exp. 32,202 61,657 76,905 125,939 131,287 136,317 143,661 Total Tax 12,841 21,127 26,085 41,299 46,205 50,028 52,399 Tax Rate (%) 39.9 34.3 33.9 32.8 35.2 36.7 36.5 Minority Interest 553 1,423 2,754 4,825 4,825 4,825 4,825 Reported PAT 18,808 39,107 48,066 79,815 80,257 81,465 86,436 Adjusted PAT 18,808 39,107 48,066 79,815 80,257 81,465 86,436 Change (%) 140.9 107.9 22.9 66.1 0.6 1.5 6.1 Margin (%) 0.8 1.5 2.0 4.2 4.4 3.7 3.8 Consolidated - Balance Sheet (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Equity Share Capital 14,462 14,462 14,462 14,462 14,462 14,462 14,462 Total Reserves 153,294 179,801 211,023 265,735 318,455 372,116 428,916 Net Worth 167,755 194,263 225,485 280,197 332,916 386,577 443,378 Minority Interest 10,766 11,603 12,998 15,866 15,866 15,866 15,866 Total Loans 328,604 327,985 210,177 266,268 266,000 260,000 236,000 Deferred Tax Liabilities 16,059 12,511 13,468 19,769 25,241 25,241 25,241 Capital Employed 523,184 546,362 462,128 582,101 640,023 687,684 720,484 Gross Block 437,803 490,974 536,605 592,662 669,600 834,600 874,600 Less: Accum. Deprn. 198,173 222,858 251,399 273,671 301,860 331,944 366,128 Net Fixed Assets 239,630 268,115 285,207 318,991 367,741 502,657 508,473 Goodwill on Consolidation 7,584 7,684 5,888 6,247 610 610 610 Capital WIP 74,633 93,717 157,873 221,188 252,625 170,536 197,704 Total Investments 74,698 69,853 77,118 77,363 77,363 77,363 77,363 Curr. Assets, Loans&Adv. 399,112 448,233 336,979 308,625 287,724 339,750 354,943 Inventory 199,567 231,695 174,000 154,969 152,755 182,381 190,346 Account Receivables 43,551 45,437 29,484 24,235 23,889 28,272 29,474 Cash and Bank Balance 28,498 23,113 34,463 46,290 31,173 49,190 55,216 Loans and Advances 127,497 147,988 99,033 83,131 79,907 79,907 79,907 Curr. Liability & Prov. 272,473 341,241 400,937 350,313 346,040 403,232 418,608 Account Payables 240,795 299,307 344,770 299,161 294,887 352,079 367,456 Provisions 31,678 41,934 56,166 51,152 51,152 51,152 51,152 Net Current Assets 126,639 106,992 -63,958 -41,689 -58,315 -63,482 -63,666 Appl. of Funds 523,184 546,362 462,128 582,101 640,023 687,684 720,484 E: MOSL Estimates

3 January 2017 34



Ratios Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Basic (INR) EPS 13.0 27.0 33.2 55.2 55.5 56.3 59.8 Cash EPS 30.0 45.1 54.2 72.0 72.2 75.1 78.4 BV/Share 116.0 134.3 155.9 193.8 230.2 267.3 306.6 DPS 6.0 17.0 11.2 15.5 16.3 16.4 17.5 Payout (%) 53.8 73.6 40.0 33.0 34.3 34.1 34.3 Valuation (x) P/E 19.7 11.8 11.8 11.6 10.9 Cash P/E 12.1 9.1 9.1 8.7 8.3 P/BV 4.2 3.4 2.8 2.4 2.1 EV/Sales 0.5 0.6 0.6 0.5 0.5 EV/EBITDA 11.7 8.2 8.3 7.7 7.3 Dividend Yield (%) 1.7 2.4 2.5 2.5 2.7 FCF per share 107.6 -12.2 8.8 35.8 41.3 Return Ratios (%) RoE 11.5 21.6 22.9 31.6 26.2 22.6 20.8 RoCE 7.2 10.5 12.2 18.8 16.0 15.1 14.9 RoIC 7.3 12.6 15.7 36.8 29.6 23.3 20.7 Working Capital Ratios Fixed Asset Turnover (x) 5.5 5.4 4.5 3.2 2.8 2.6 2.6 Asset Turnover (x) 4.6 4.8 5.2 3.2 2.9 3.2 3.2 Inventory (Days) 30 32 26 30 30 31 31 Debtor (Days) 7 6 4 5 5 5 5 Creditor (Days) 36 41 52 58 58 59 59 Leverage Ratio (x) Current Ratio 1.5 1.3 0.8 0.9 0.8 0.8 0.8 Interest Cover Ratio 1.7 3.4 5.6 10.4 12.0 10.2 10.7 Net Debt/Equity 1.3 1.2 0.4 0.5 0.5 0.3 0.2 Consolidated - Cash Flow Statement (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E OP/(Loss) before Tax 32,203 61,657 76,905 125,939 131,287 136,317 143,661 Depreciation 24,627 26,109 30,267 24,286 24,147 27,173 27,016 Direct Taxes Paid -12,841 -21,127 -26,085 -41,299 -46,205 -50,028 -52,399 (Inc)/Dec in WC -15,790 14,262 182,299 -7,218 -1,714 23,183 6,209 CF from Operations 28,198 80,901 263,386 101,709 107,515 136,645 124,486 Others -591 11,896 2,101 11,039 -4,825 -4,825 -4,825 CF from Operating incl EO 27,607 92,797 265,487 112,747 102,690 131,820 119,662 (Inc)/Dec in FA -51,249 -73,645 -109,852 -130,441 -90,000 -80,000 -60,000 Free Cash Flow -23,642 19,152 155,635 -17,694 12,690 51,820 59,662 (Pur)/Sale of Investments 4,208 4,845 -7,265 -245 0 0 0 CF from Investments -47,041 -68,800 -117,117 -130,686 -90,000 -80,000 -60,000 Issue of Shares 0 0 0 0 0 0 0 Inc/(Dec) in Debt 44,788 -618 -117,808 56,091 -268 -6,000 -24,000 Dividend Paid -10,119 -28,763 -19,212 -26,326 -27,538 -27,804 -29,636 Others 0 0 0 0 0 0 0 CF from Fin. Activity 34,669 -29,381 -137,021 29,766 -27,806 -33,804 -53,636 Inc/Dec of Cash 15,235 -5,385 11,349 11,827 -15,116 18,017 6,025 Opening Balance 13,263 28,498 23,113 34,462 46,289 31,173 49,190 Closing Balance 28,498 23,113 34,462 46,289 31,173 49,190 55,215

3 January 2017 35


Hindustan Petroleum Huge capex of INR100b in each of next 2-3 years

To bridge the gap between refining and marketing, the company is expanding its Vizag refinery capacity from 8.3mmtpa to 15mmtpa at a capex of INR210b.

We expect negative cash flow of INR102/share over FY17-19, which is expected to increase net debt:equity from 0.2x in FY16 to 0.7x in FY19.

We value the company using SOTP at INR543.

Capex of INR100b in each of next three years Considering the upcoming INR210b Vizag expansion, INR40-50b for BS-VI

upgradation and investment on marketing/pipeline infrastructure, we expect capex outflow of INR100b in each of next three years.

We expect net debt to rise from INR145b in FY16 to INR299b in FY19. Bhatinda turns around Bhatinda refinery recorded PAT of INR15.5b in 1HFY17. It is expected to report

good performance in 3QFY17 too with higher refining margins and inventory gains.

At 49% stake, Bhatinda refinery adds INR31 to the valuation of HPCL. Market share could decline Both BPCL (via Kochi expansion) and IOCL (via Paradip commissioning) have

ramped up their marketing infrastructure in the south. We expect this may result in market share loss for HPCL in the south till Vizag expansion comes into play.

We expect marketing EBITDA of INR57b in FY19. Valuation and recommendation Global peers are trading at 10.7x FY18E EPS and 6.8x FY18E EBITDA. HPCL is

trading at 9.9x FY18E EPS and 7.6x FY18E EBITDA. We value HPCL’s refining segment at 5x, marketing at 8x, pipeline at 7.5x and

add investments to arrive at a target price of INR543 for the stock. We have a Buy rating on the stock.

3 January 2017 36


Story in charts

Exhibit 61: Refining throughput of HPCL


Exhibit 62: GRM trend of HPCL






Exhibit 65: Return rations


Exhibit 66: Debt and interest burden


15.8 15.5

16.2

17.2

16.5

16.0 16.0


Refinery Throughput (mmt)

2.1

5.0

5.6 5.4

0.0

2.0

4.0

6.0

8.0


HPCL GRM (USD/bbl) Reuters Singapore GRM (US$/bbl)

30.3

38.3

2.8

4.0

0

1

3

4

6

7

0

12

24

36

48


Marketing sales volume (mmt) YoY (%)

14.1

20.0

3.2

-8

0

8

16

24

0

5

10

15

20

25


Pipeline Throughput (mmt) YoY (%)

6.7

18.0

4.6 8.7

0

8

16

24

32


RoE ROCE

323,111 299,210

20,193

9,000

0

6,000

12,000

18,000

24,000

0

100,000

200,000

300,000

400,000


Net debt (INRm) Interest

3 January 2017 37


Exhibit 67: EBITDA growth and margins


Exhibit 68: PAT growth and margins







Valuation EBITDA (INR m) EV/EBITDA (x) Valuation (INR m) Refining 25,658 5 128,288 Marketing 56,784 8 454,272 Pipeline 13,213 7.5 99,100 Others 3,861 5 19,307 Total 700,968 Net debt (FY18) 264,141 Oil bonds 49,857 Net debt excluding oil bonds (FY18) 214,285 Standalone valuation 486,683 Value per share (INR) 479 Stake in MRPL (INR) 31 Stake in Oil India (INR) 2 Stake in HMEL (INR) 31 Total value (INR) 543


6.9 4.8

2.1

5.0

0

2

3

5

6

-15

0

15

30

45



0.4

2.3

(0.7) 2.3

-25

0

25

50

75

100

0.0

0.8

1.5

2.3

3.0

3.8


PAT Margins (%) PAT YoY (%)

8.9

24.6

9.1

3

8

13

18

23

28

Dec-

06

Mar

-08

Jun-

09

Sep-

10

Dec-

11

Mar

-13

Jun-

14

Sep-

15

Dec-


4.0

12.7

6.6

1.1 0

4

8

12

16

Dec-

01

Feb-

03

Apr-

04

Jun-

05

Aug-

06

Oct

-07

Nov

-08

Jan-

10

Mar

-11

May

-12

Jul-1

3

Aug-

14

Oct

-15

Dec-

16


3 January 2017 38



Standalone - Income Statement (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Net Sales 2,065,293 2,231,454 2,063,804 1,792,811 1,733,622 1,922,437 2,001,869 Change (%) 15.9 8.0 -7.5 -13.1 -3.3 10.9 4.1 Finished Goods 1,281,786 1,451,380 1,292,784 1,159,484 1,127,380 1,212,306 1,268,476 Raw Materials Cons 639,921 613,881 599,079 407,012 382,267 486,589 500,492 Other Exp 104,163 114,112 117,765 150,146 123,221 128,623 133,384 Total Expenditure 2,025,869 2,179,372 2,009,627 1,716,643 1,632,868 1,827,519 1,902,352

% of Sales 98.1 97.7 97.4 95.8 94.2 95.1 95.0 EBITDA 39,424 52,081 54,176 76,168 100,754 94,918 99,516 Margin (%) 1.9 2.3 2.6 4.2 5.8 4.9 5.0 Depreciation 19,315 21,884 19,712 26,668 27,268 29,087 31,087 EBIT 20,109 30,197 34,465 49,500 73,486 65,831 68,429 Int. and Finance Charges 18,377 15,046 7,066 6,401 5,373 7,500 9,000 Other Income 12,300 11,004 14,142 14,282 13,273 10,518 10,974 PBT bef. EO Exp. 14,032 26,155 41,541 57,381 81,387 68,849 70,403 EO Items 714 0 0 0 0 0 0 PBT after EO Exp. 14,746 26,155 41,541 57,381 81,387 68,849 70,403 Total Tax 5,699 8,817 14,209 18,753 27,767 22,947 23,465 Tax Rate (%) 38.6 33.7 34.2 32.7 34.1 33.3 33.3 Reported PAT 9,047 17,338 27,333 38,627 53,619 45,901 46,938 Adjusted PAT 9,047 17,338 27,333 38,627 53,619 45,901 46,938 Change (%) -0.7 91.6 57.6 41.3 38.8 -14.4 2.3 Margin (%) 0.4 0.8 1.3 2.2 3.1 2.4 2.3 Standalone - Balance Sheet (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Equity Share Capital 10,170 10,170 10,170 10,170 10,170 10,170 10,170 Total Reserves 127,094 139,951 150,051 174,994 208,164 237,933 268,373 Net Worth 137,264 150,122 160,221 185,165 218,335 248,103 278,543 Total Loans 324,583 319,301 170,556 145,220 230,000 270,000 330,000 Deferred Tax Liabilities 35,984 39,084 41,036 48,105 48,105 48,105 48,105 Capital Employed 497,830 508,506 371,813 378,490 496,439 566,208 656,648 Gross Block 370,062 424,668 481,749 541,493 561,749 601,749 641,749 Less: Accum. Deprn. 144,575 165,545 191,121 217,789 243,296 272,383 303,471 Net Fixed Assets 225,487 259,122 290,628 323,705 318,453 329,366 338,278 Capital WIP 51,729 45,856 34,744 30,000 77,506 137,506 197,506 Total Investments 106,269 108,598 112,415 109,947 109,947 109,947 109,947 Curr. Assets, Loans&Adv. 378,962 362,204 237,719 241,865 212,200 238,730 270,640 Inventory 164,387 187,754 129,723 127,091 107,367 120,166 125,086 Account Receivables 49,350 54,660 36,031 42,296 26,123 31,602 32,907 Cash and Bank Balance 1,471 347 171 1,483 5,531 5,859 32,727 Loans and Advances 163,754 119,444 71,796 70,995 73,180 81,104 79,920 Curr. Liability & Prov. 264,617 267,275 303,693 327,027 221,667 249,341 259,724 Account Payables 241,622 243,978 273,903 305,459 203,549 230,317 239,749 Provisions 22,995 23,296 29,790 21,568 18,118 19,024 19,975 Net Current Assets 114,345 94,930 -65,974 -85,162 -9,467 -10,611 10,917 Appl. of Funds 497,830 508,506 371,813 378,490 496,439 566,208 656,648 E: MOSL Estimates

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Ratios

Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Basic (INR) EPS 8.9 17.0 26.9 38.0 52.7 45.1 46.2

Cash EPS 27.9 38.6 46.3 64.2 79.5 73.7 76.7 BV/Share 135.0 147.6 157.5 182.1 214.7 243.9 273.9 DPS 2.8 5.2 8.2 11.5 15.8 13.6 13.9 Payout (%) 37.2 35.4 36.5 36.4 35.1 35.1 35.1 Valuation (x)

P/E 17.3 12.2 8.8 10.3 10.1 Cash P/E 10.0 7.2 5.8 6.3 6.0 P/BV 2.9 2.5 2.2 1.9 1.7 EV/Sales 0.3 0.3 0.4 0.4 0.4 EV/EBITDA 11.9 8.1 6.9 7.8 7.7 Dividend Yield (%) 1.8 2.5 3.4 2.9 3.0 FCF per share 166.8 37.8 -59.6 -23.1 -16.4 Return Ratios (%) RoE 6.7 12.1 17.6 22.4 26.6 19.7 17.8 RoCE 4.5 5.9 8.0 13.0 14.7 10.5 9.4 RoIC 3.8 5.8 7.8 14.4 17.9 14.2 14.5 Working Capital Ratios Asset Turnover (x) 4.1 4.4 5.6 4.7 3.5 3.4 3.0 Debtor (Days) 9 9 6 9 6 6 6 Leverage Ratio (x) Net Debt/Equity 1.6 1.4 0.4 0.2 0.5 0.6 0.7 Standalone - Cash Flow Statement (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E

OP/(Loss) before Tax 14,746 26,155 41,541 57,800 81,387 68,849 70,403 Depreciation 19,344 21,884 19,712 26,668 27,268 29,087 31,087 Direct Taxes Paid -5,699 -8,817 -14,209 -18,912 -27,767 -22,947 -23,465 (Inc)/Dec in WC -34,913 18,291 160,727 20,341 -71,487 1,472 5,340 CF from Operations -6,522 57,513 207,771 85,896 9,400 76,461 83,365

Others 5,131 3,101 1,952 7,069 0 0 0 CF from Operating incl EO -1,391 60,614 209,723 92,965 9,400 76,461 83,365

(Inc)/Dec in FA -43,619 -49,647 -40,106 -54,523 -70,000 -100,000 -100,000 Free Cash Flow -45,010 10,968 169,617 38,442 -60,600 -23,539 -16,635

(Pur)/Sale of Investments -2,564 -2,329 -3,816 3,754 -1,286 0 0 CF from Investments -46,183 -51,976 -43,922 -50,769 -71,286 -100,000 -100,000

Inc/(Dec) in Debt 49,790 -5,282 -148,744 -25,336 84,780 40,000 60,000 Dividend Paid -3,368 -6,141 -9,985 -14,061 -18,846 -16,133 -16,497 Others 359 1,661 -7,248 -1,487 0 0 0 CF from Fin. Activity 46,782 -9,762 -165,977 -40,884 65,934 23,867 43,503 Inc/Dec of Cash -792 -1,124 -176 1,312 4,048 328 26,868

Opening Balance 2,264 1,471 347 171 1,483 5,531 5,859 Closing Balance 1,471 347 171 1,483 5,531 5,859 32,727

SECTOR RESEARCH

SECTOR RESEARCH

SECTOR RESEARCH

THEMATIC GALLERY

http://institution.motilaloswal.com/emailer/Research/AUTO-20150902-MOSL-DB-PG026.pdf

http://institution.motilaloswal.com/emailer/Research/BANK-DIGI-20160309-MOSL-SU-PG066.pdf

http://institution.motilaloswal.com/emailer/Research/ENGG-20160420-MOSL-SU-PG044.pdf

http://institution.motilaloswal.com/emailer/Research/INDIA-AS-20160323-MOSL-SU-PG100.pdf

http://institution.motilaloswal.com/emailer/Research/ENGG-ELECTRICALS-20160620-MOSL-SU-PG058.pdf

http://institution.motilaloswal.com/emailer/Research/UTILITIES-20160712-MOSL-SU-PG112.pdf

http://institution.motilaloswal.com/emailer/Research/ENGG-TD-SU-20160217-PG064.pdf

http://institution.motilaloswal.com/emailer/Research/GST-20160721-MOSL-SU-PG060.pdf

http://institution.motilaloswal.com/emailer/Research/ECO-THEMATIC-20160613-MOSL-SU-PG074.pdf

http://institution.motilaloswal.com/emailer/Research/TEL-20161005-MOSL-SU-PG090.pdf

3 January 2017 41


N O T E S

3 January 2017 42


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