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Beyond a Nine-day Wonder
India Refining21 April 2016
Elara Securities (India) Private Limited
Swarnendu Bhushan
+91 22 6164 8504
Durgesh Poyekar
+91 22 6164 8541
Refining
Elara Securities (India) Private Limited
Notes
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Elara Securities (India) Private Limited
Swarnendu Bhushan • [email protected] • +91 22 6164 8504 Durgesh Poyekar • [email protected] • +91 22 6164 8541
Beyond a nine-day wonder Refining margin under pressure
Global refiners have been having a bull run of late. The year 2015 recorded a GRM of USD 7.7/bbl, the highest since 2011. This was supported by increased demand for auto fuels, naphtha in gasoline blending & petrochemicals feedstock and low fuel & loss. However, this is set to change. China’s policy of offering tax breaks for small car buyers, which propped up demand, is ending on 1 January 2017. Overall auto sales in China could see tepid growth. In addition, global refinery net capacity is set to increase by ~3mnbopd over 2016-18E, matching demand growth. However, 15% of this demand will be met through bio fuels, implying excess supply of 0.45mnbopd. Additionally, China teapot refineries could add ~82mn tonnes pa. HHence, we expect refining margin to contract to USD 5-6/bbl in the next 2-3 years.
Reliance faces unrefined prospects
With ~70% of standalone EBIT coming from refining, Reliance Industries (RIL IN) looks the most vulnerable in a benign refining environment. Further, our estimates show core expansion projects can add only ~USD 1.6bn (vs the Street expectations of ~USD 3.0bn) amid weak LNG prices and low-cost ethylene expansion in the US. Also, traditional export markets (Africa & Europe) are likely to face competition from the Middle East refineries. Shale investments may turn out to be a dampener, with several companies having taken write-offs. Reliance Jio remains a drag, with more than ~INR 1tn already spent and no commercial launch on the horizon.
OMC marketing margin expansion: an illusion
We reiterate our Contrarian view there will be no significant expansion in marketing margin by OMC on auto fuels post deregulation for the next 2-3 years. While marketing margin on auto fuels remains subdued, we believe commissioning of the 15mn-tonne-pa Paradip refinery will provide Indian Oil (IOCL IN) some respite in a benign refining environment. We believe the best days are over for Bharat Petroleum (BPCL IN) and Hindustan Petroleum (HPCL IN). BPCL’s Mozambique block is not seeing traction while HPCL is vulnerable due to highest leverage to marketing. With MRPL (MRPL IN) showing improvement in core GRM and benefiting from full utilization of its polypropylene unit in FY17, the company is likely to do well. Chennai Petroleum’s (CPCL IN) capex would yield results only from FY18 while its valuation remains highly sensitive to fluctuation in GRM. IIOCL and MRPL are our top picks.
India | Oil & Gas 21 April 2016
Thematic Report
Refining
GRM trend of RIL, MRPL & CPCL
Source: Companies
GRM trend of OMCs
Source: Companies
Price performance
(%) 3M 6M 12M
Sensex 3.1 (4.5) (11.8)
RIL (1.0) 19.3 15.6
IOCL (5.2) 4.1 10.5
BPCL 3.3 7.2 13.1
HPCL (2.4) 10.3 29.9
MRPL 0.3 20.0 (8.4)
CPCL 3.1 (12.0) 162.6
Source: Bloomberg
Key Financials Company Rating Mcap
CMP* (INR)
Target (INR)
Upside/ Downside
(%)
EV/EBITDA (x) P/E (x) ROE (%)
(INR bn)
(USD mn) FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
RIL Sell 3,454 51,833 1,066 966 (9) 13.2 10.3 11.1 9.3 13.7 11.3 12.4 10.6 11.0 12.1 10.0 10.7
IOCL Buy 1,011 15,170 416 599 44 14.7 6.6 5.9 5.2 28.4 8.2 7.5 6.5 7.8 17.9 16.0 16.5
BPCL Reduce 669 10,043 926 909 (2) 9.4 7.8 8.7 7.0 13.2 11.4 12.9 10.4 24.3 24.2 18.8 20.6
HPCL Reduce 288 4,321 850 875 3 8.5 6.7 6.7 6.5 10.6 8.6 9.2 9.0 17.6 19.8 16.5 15.2
MRPL Buy 118 1,765 67 90 34 NA 6.7 4.6 4.7 NA 24.9 6.3 6.3 (28.2) 12.7 32.2 25.8
CPCL Sell 30 452 202 154 (24) NA 6.0 7.6 5.8 NA 5.5 11.0 7.7 (2.3) 29.4 12.7 16.2
1 USD = INR 66.6; Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
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Refining
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Table of Content
The new normal…………………………………………………………………………………………………………….. 3
Benign refining environment………………………………………………………………………………………. 4
Global refining utilization improves…………………………………………………………………….. 4
Capacity glut adds to woes………………………………………………………………………………….. 4
Refining margin already cooling off……………………………………………………………………. 7
Downstream party winding down……………………………………………………………………………… 8
Exports to suffer: RIL most vulnerable…………………………………………………………………. 8
OMC not out of the woods…………………………………………………………………………………... 9
Under-recoveries: gone or in hiding? ………………………………………………………………… 11
Company Section
Reliance Industries
Likely to suffer the most……………………………………………………………………..………………… 15
Concerns remain; limited upside…………………………………………………………………………. 17
Oil marketing companies
IOCL: best pick among OMC……………………………………………………………………..…………. 25
Sifting for winners……………………………………………………………………..…………………………... 26
Chennai Petroleum
GRM softening to hit CPCL the hardest……………………………………………………………… 37
Mangalore Refinery
Core performance improving………………………………………………………………………………. 41
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All good things come to an end
SG refining margin in 2015 rose to USD 7.7/bbl, primarily led by strong crack spread on light distillates (naphtha & gasoline). However, our research shows the glut in refining supply will worsen and margin will soften. Additionally, competition is expected to intensify in the export markets and may force a change in rules on the domestic front for the long term. TThis report highlights champions — IOCL and MRPL — that are going to last well beyond the nine-day wonder.
Not so benign for RIL
On the back of strong refining performance, RIL has outperformed the Nifty by 26% in the past year. Our research shows the era of strong refining margin is over and RIL would be adversely hit by softening GRM. Returns from the core refining and petrochemicals projects worth ~USD 15bn also remain elusive. We downgrade RIL to SSell rating with a new target price of INR 966 from INR 1,070 based on a SOTP valuation.
Exhibit 1: RIL outperforms the Nifty 26% in past year
Source: Bloomberg, Elara Securities Research
Best is in the past for HPCL and BPCL
Over the past year, HPCL has outperformed IOCL, BPCL and Nifty by 19%, 16% and 41%, respectively, due to an expected expansion in marketing margin on gasoil and gasoline. However, we have seen only slight margin expansion in gasoil and no expansion in gasoline from FY14. We firmly believe that in the absence of expansion in marketing margin, FY16 will be the best year for earnings. We expect HPCL to post only a ~2% EBITDA CAGR during FY16-18E. We add INR 155 for its investments to arrive at a new target price of INR 875 from INR 1,016 based on 5.5x (from 6.0x) FY18E EV/EBITDA. We revise our rating to Reduce from Buy, given a benign refining environment and no expected expansion in marketing margin.
BPCL may fare slightly better than HPCL and report improved profitability with the commissioning of its Brownfield expansion at Kochi. We expect an EBITDA CAGR of 5% during FY16-18E. However, concerns remain on its E&P portfolio amid low LNG and crude oil prices. We add INR 234 for its investments to arrive at a new target price of INR 909 from INR 1,006 based on 5.5x (from 6.0x) FY18E EV/EBITDA. We downgrade our rating to RReduce from Buy, given 1) a benign refining environment, 2) no expected expansion in marketing margin and low LNG & crude oil prices.
Indian Oil to shine, thanks to Paradip!
IOCL is expected to post an EBITDA CAGR of 12% during FY16-18E. The INR 345bn Paradip refinery may even surprise, with a higher-than-estimated utilization of 30% in FY17 and 70% in FY18. We slightly revise our target price to INR 599 from INR 607 based on 5.5x (unchanged) FY18E EV/EBITDA. We reiterate our BBuy rating.
Exhibit 2: HPCL outperforms Nifty 41% in past year
Source: Bloomberg, Elara Securities Research
MRPL shows improvement in its core performance
The company seems to have stabilized post the INR 150bn Brownfield expansion. Utilization of the polypropylene unit has been ramped upto 100% in the past few days. We expect a standalone EBITDA CAGR of 20% during FY16-18E. The recently merged OMPL is yet to stabilize but it is likely from FY17. We reiterate our BBuy rating with a target of INR 90 on 5.5x FY18E EV/EBITDA.
GRM hook to hit CPCL hard
Although IOCL has infused funds into CPCL, we expect it to underperform on the operational front in a falling GRM environment. CPCL is implementing a residue upgradation project, which should improve distillate yields. However, the benefits are likely to accrue from FY18. We have a TP of INR 154 on 5.5x FY18E EBITDA. We revise our rating to Sell from Reduce, due to the correction of 41% in the stock price since its Q3FY16 result.
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r-15
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-15
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Jul-1
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Oct
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No
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Nifty RIL
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Nifty IOCL BPCL HPCL
The new normal � Benign GRM environment vs robust GRM of USD 7.7/bbl in 2015
� Core projects of RIL to add USD 1.6bn vs guidance of USD 3.0bn; Jio to remain a drag
� Paradip to drive IOCL’s performance; EBITDA CAGR of ~40% over FY15-18E
Refining
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Global refining utilization improves Higher demand for petroleum products as a result of lower prices resulted in an increase in global refinery utilization in 2015. The IEA stated utilization of 81.5% in Q4CY15, the highest since 2007. Higher utilization also has supported strong refining margin.
Exhibit 3: Global refining utilization in an uptrend
Source: IEA, Elara Securities Research
Low fuel prices boost auto demand
Low pump prices resulted in increased demand for auto fuels as seen in auto sales growth globally in 2015. This was supported by tax breaks on smaller vehicles in China from October 2015 to rejuvenate its fledgling auto industry. Auto sales in China grew by 7% in 2015. Post the tax break on smaller vehicles from October 2015, growth has been in the double digits. It is likely to continue in 2016, but is expected to slow in 2017 upon expiry of the scheme from January 1, 2017. Similarly, India recorded growth of 8% in auto sales in 2015 vs 0.7% in 2014, as per Bloomberg. In particular, gasoline demand in India was supported by higher sales of two-wheelers, as per Petroleum Planning and Analysis Cell (PPAC). Robust demand of gasoline thus helped in strong crack spread. Gasoline spread increased from ~USD 11.0/bbl in FY15 to ~USD 14.4/bbl in FY16.
Cheaper naphtha another plus
Low naphtha prices raised profitability of naphtha-based petrochemical producers. This combined with increased blending of naphtha into gasoline resulted in naphtha crack spread moving from a loss of USD 1.8/bbl in FY15 to a gain of USD 2.7/bbl in FY16. Crack spread was more pronounced at USD 6.0-6.6/bbl in H2FY16. However, lower economic growth restricted cracks of middle distillates (kerosene, jet fuel & diesel). Gasoil registered a decline in cracks from USD 17.2/bbl in FY15 to USD 13.8/bbl in FY16. Low oil prices also helped GRM through lower fuel & loss. At 10% fuel & loss, a refinery loses only USD 3/bbl at crude cost of USD 30/bbl instead of USD 10/bbl at crude cost of USD 100/bbl, a boost of USD 7/bbl in GRM.
Exhibit 4: Strong auto sales growth
Source: Bloomberg, Elara Securities Research
Capacity glut adds to woes A global refining surplus is re-emerging, with significant capacity growth expected over the next three years, particularly in Asia, the Middle East, and in Latin America. During 2016-18E, around 1.6mnbopd of refining capacity would be added in the Asia-Pacific region, as per our analysis. The Middle East will add another 0.75mnbopd of refining capacity and condensate splitters during the same period. Additionally, there would be an addition of 0.5mnbopd of condensate splitters in the US.
According to OPEC, Iraq targets constructing four Greenfield refineries with total capacity of 0.75mnbopd. Projects also are planned at existing refineries at Karbala & Erbil in Iraq and Sitra in Bahrain. National Iranian Oil Refining Company is undertaking projects at Bandar Abbas, Abadan, Isfahan and Tabriz. The African continent has made announcements of refinery additions. However, they have been delayed and unlikely to fructify in the next 2-3 years.
Net capacity addition of ~3mnbopd over 2016-18
Including the main projects, US-based Valero Energy (VLO US, CMP: USD 59, Not Rated) estimates ~3mnbopd of net capacity addition (net of closures & restarts) would take place during 2016-18.
Exhibit 5: Estimated net global refinery CDU additions
Source: Valero Energy, Elara Securities Research
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Y07
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2015 2016 2017 2018 2019
(MM
BPD
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China Middle East Other (incl US and Latin America
Benign refining environment � Capacity utilization of 81.5% in Q4CY15, the highest since 2007
� Refinery capacity addition to outpace demand by ~0.45mnbopd over 2016-18
� China teapot refineries can potentially add ~82mmtpa of throughput
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We expect demand to grow at ~1mnbopd each year. Although demand and supply growth appears to be in sync, 15% of this demand growth is expected to be met through bio fuels. This translates into supply addition of 3.0mnbopd during 2016-18E vs demand addition of 2.55mnbopd. Additionally, there are a few gas-to-liquids (GTLs) and coal-to-liquids (CTLs) projects, which would add to the supply. Hence, capacity growth would outgrow demand even if we exclude the impact of yield improvements, GTLs and CTLs.
Global capacity utilization stood at 81% in Q4CY15, according to IEA, which means there will still be a lot of capacity surplus for the long term. Unless closures take place, refining utilization will remain low and result in poor refining margin.
Capacity closures led by Japan & Australia
Since 2008, 6.3mnbopd of refining capacity has been shut, as per Valero Energy. Out of this, 1.2mnbopd of capacity has been shut in Japan, due to poor demand
and mandatory requirement of atleast 13% cracking ratio. Australia also has seen a closure of 0.3mnbopd of refining capacity. While the smaller ones remain permanently closed, a few large ones have been revived in the past few years to take advantage of a good refining environment.
Exhibit 7: Closure of capacity accelerates in the Asia-Pacific region
Source: Valero Energy, Elara Securities Research
0 200 400 600 800
1,000 1,200 1,400 1,600 1,800
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(bo
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NA Asia/Australia Europe
Exhibit 6: Major refining capacity additions
Year Company Location Capacity (bopd) Greenfield / Brownfield
Asia Pacific
2016 Sinopec Jiujiang 30,000 B
2016 CNOOC Taizhou 60,000 B
2016 Sinopec Hainan 75,000 B
2017 CNOOC Huizhou, Guangdong 200,000 B
2017 PetroChina Huabei, Renqiu, Hebei 100,000 B
2017 Sinopec, Kuwait Petroleum, Total Zhanjiang 300,000 G
2016 PetroChina, Saudi Aramco Kunming, Yunnan 200,000 G
2018 BPCL Bina 36,000 B
2016 BPCL Kochi 120,000 B
2016 IOCL Paradip 300,000 G
2017 PetroVietnam, Idemitsu Kosan, Kuwait Petroleum, Mitsui Chemicals Nghi Son, Vietnam 200,000 G
Middle East
2017-18 Saudi Aramco Jazan, Saudi Arabia 400,000 G
2018 Oman Oil Refineries Sohar, Oman 82,000 B
2016 Qatar Petroleum, Total, Idemitsu, Cosmo, Marubeni & Mitsui Laffan 2, Qatar 150,000 B
2016 Persian Gulf Star Bandar Abbas, Iran 120,000 G
Latin America
2016 Ecopetrol Cartagena, Colombia 85,000 B
US (condensate splitters)
2016 Valero Energy Houston 90,000 G
2016 Valero Energy Corpus Christi 70,000 G
2016 Enterprise Products Partners Mont Belvieu 85,000 G
2016 Magellan Midstream Corpus Christi 100,000 G
2016 Martin Midstream Corpus Christi 100,000 G
Source: OPEC, Companies, Elara Securities Research
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Exhibit 8: Closures and restarts
Company Refinery Country/ Region
Capacity (bopd)
Year Restarted Remarks
Chevron Perth Amboy, NJ US 80 2008 No Bought by Buckeye Partners in 2012; being operated as a terminal
Big West Bakersfield, CA US 65 2008 No Bought by Alon; a few secondary units have been used to process intermediate feedstock; being revamped to process light crude
Bayernoil Ingolstadt, Germany Europe 102 2008 Yes Bought over & restarted in 2012 by Gunvor
Shell Yabucoa, Inc. Yabucoa, Puerto Rico Puerto Rico 76 2008 No
Sunoco Westville, NJ US 145 2009 No
Valero Energy Delaware US 210 2009 Yes Bought by PBF and restarted in 2011
Western Bloomfield, NM US 17 2009
Flint Hills Resources North Pole, AK US 85 2009
Petroplus Teesside, UK Europe 117 2009 No Bought by Greenergy & used as a logistics terminal
Total Gonfreville L'Orcher, France Europe 90 2009
Total Dunkirk, France Europe 140 2009 No
Nihonkai Oil Toyama, Japan Japan 57 2009
Western Yorktown, VA US 65 2010
Shell Montreal, Canada Canada 130 2010 No
Petroplus Reichstett, France Europe 85 2010
ConocoPhillips Wilhelmshaven, Germany Europe 260 2010 No Bought over by Hestya & converted into logistics terminal
Fuji Oil Sodegaura, Japan Japan 50 2010 No
JX Holdings Oita, Japan Japan 24 2010 No
JX Holdings Mizushima, Japan Japan 110 2010 No
JX Holdings Negishi, Japan Japan 70 2010 No
JX Holdings Kashima, Japan Japan 18 2010 No
Sunoco Marcus Hook, PA US 175 2011 No Converted into a logistics terminal
Hovensa St. Croix, USVI US 150 2011 No
OMV Petrom Arpechim, Romania Europe 70 2011
Tamoil Cremona, Italy Europe 94 2011
Toa/Showa Shell Ogimachi, Japan Japan 120 2011 No
Fushun Petrochem. Fushun, China China 70 2011
Alon Paramount, CA US 90 2012
Flint Hills Resources North Pole, AK US 48 2012
LyondellBasell Berre L'Etang, France Europe 105 2012 No
Petroplus Coryton, U.K. Europe 175 2012 No Bought over by Vopak, Greenergy & Shell and converted into logistics terminal
Petroplus Petit Couronne, France Europe 160 2012 No
Total/Erg Rome, Italy Europe 88 2012
ExxonMobil Fawley, U.K. Europe 80 2012
Unipetrol Paramo, Czech Republic Europe 20 2012
Hovensa St. Croix, USVI US 350 2012 Probable Bought over by Limetree Bay Holdings in late 2015, expected to start within 18 months
Valero Energy San Nicholas, Aruba US 235 2012 Probable Citgo plans to restart the same
TNK-BP Lisichansk, Ukraine Europe 175 2012 No Rosneft planned restart in 2014; caught between Russia-Ukrainian tension
Shell Clyde, Australia Australia 75 2012 No
Hess Port Reading, NJ US 70 2013
Imperial Oil Dartmouth, Canada Canada 88 2013
Shell Harburg, Germany Europe 107 2013 Probable Nynas took it over and is upgrading the CDU for restarting it in 2016
ENI Porto Marghera, Italy Europe 80 2013
Cosmo Oil Sakaide, Japan Japan 140 2013 No
Flint Hills Resources North Pole, AK US 80 2014
MOL Mantova, Italy Europe 69 2014
Essar Stanlow, U.K. Europe 101 2014 No Partial shutdown
Murphy Milford Haven, U.K. Europe 130 2014 No Bought by Puma Energy & converted into logistics terminal
Cosmo Oil Yokkaichi, Japan Japan 43 2014 No
Idemitsu Kosan Tokuyama, Japan Japan 114 2014 No
Caltex Kurnell, Australia Australia 135 2014 No Being dismantled
Tonen-General Kawasaki, Japan Japan 67 2014 No
Tonen-General Wakayama, Japan Japan 38 2014 No
JX Holdings Muroran, Japan Japan 180 2014 No
Kyokuto Petroleum Ltd. Chiba, Japan Japan 23 2014 No
Chinese Petroleum Corp. Kaohsiung, Taiwan Taiwan 200 2015 No
BP Bulwer Island, Australia Australia 102 2015 No
Idemitsu Kosan Chiba, Japan Japan 20 2015 No
Tonen-General Kawasaki, Japan Japan 10 2015 No
Petrobras/Nansei Sekiyu Nishirara, Okinawa Japan 100 2015 No
Tamoil Collombey, Switzerland Europe 55 2015
Total Lindsey, U.K. Europe 110 2016
Total La Mede, France Europe 159 2016
Source: Valero Energy, Elara Securities Research
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Refining margin already cooling off As China’s tax breaks on smaller vehicles ends from January 1, 2017, demand for gasoline in China is expected to slow. Additionally, we expect oil prices to rebound soon, which will reduce the benefits from lower fuel & loss.
Asia’s refining margin also is being threatened by the possible revival of China’s teapot refineries. Teapot refineries account for ~30% of 15mnbopd of China’s total refining capacity, as per Platts. Due to restrictions on direct import of feedstock, utilization has been at 25-30%. Boosted by the strong refining environment, these refiners have been applying to the regulator for direct import of crude oil. While 12 quota applications have been approved, other eight are awaiting approval. If all 20 start, they may add ~82mmtpa of throughput, negatively affecting regional refining margin.
Exhibit 9: GRM already cooling off
Source: Reuters, Elara Securities Research
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Singapore complex GRM Avg since April 2006
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Exports to suffer: RIL most vulnerable In Q3FY16, RIL exported ~68% of products. The African countries account for ~18% of total exports while the Middle East 33% of light distillates & 10% of middle distillates. The Middle East currently consumes Euro-II fuels. Since most Middle East refineries produce low- and ultra-low sulfur gasoline and gasoil, they end up exporting their products and depend on imports for domestic consumption of high sulfur products. Any company exporting to the region would have lower realization due to high sulfur products.
Exhibit 10: RIL middle distillates exports
Source: Company, Elara Securities Research
Exhibit 12: RIL’s light distillates exports
Source: Company, Elara Securities Research
Spoiler alert: the Middle East
In 2014, the Middle East was a net exporter of ~85mn tonnes. As new refineries stabilize, net exports will increase and may have an adverse effect on imports. Additionally, battling huge fiscal deficit, several countries are scaling back subsidies on petroleum products. Reduction of these subsidies is expected to result in poor demand. This may further boost net exports of petroleum products from the Middle East.
37%
25%
10%18%
10%
1%
Asia
Australia
America
America
Europe
Africa
33%
29%
17%
5%
Asia
Australia
America
AmericaEurope
Africa
17%
Downstream party winding down � RIL exports likely to be affected by competition from the Middle East
� Marketing margin story has not played out for OMCs
� Under-recoveries threat looms large
Exhibit 11: Gasoil fuel sulfur specifications
Note: * Information in parts per million (ppm); For additional details and comments per country, visit www.unep.org/transport/pcfv/
Source: UNEP, Elara Securities Research
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Exports derail RIL prospects further
RIL exports a lot of products to countries on the continents of Africa and Europe. The Middle East refineries, due to their proximity, enjoy benefits on crude as well as product freight. As a result, RIL would have a tough time competing with Middle East refineries in the region. This may put further pressure on refining margin.
Exhibit 13: Net exports from the Middle East rising
Source: BP Statistical Review, Elara Securities Research
MRPL focus now on the domestic front
MRPL also has been steadily reducing its reliance on exports. Exports have fallen from 48% in FY13 to 30% in Q3FY16. Its Board of Directors also has approved setting up upto 100 retail outlets. The company is expected to formalize its retail entry strategy in the near term.
Exhibit 14: Exports from MRPL in a downtrend
Source: Company, Elara Securities Research
OMC not out of the woods Marketing margin expansion: an illusion
Post deregulation of gasoil in October 2014, the Street had widely anticipated marketing margin would expand. We retain our Contrarian stand there would be no significant expansion in marketing margin. Recent data underscores our assumptions. PPAC states average gross marketing margin on gasoil stands at INR 2.6/liter in FY16, which is slightly higher than INR 2.3-2.4/liter during the regulation. Post deregulation of gasoline in June 2010, we witnessed margin expansion only in FY14. Gross marketing margin on gasoline stood at INR 3.0/liter in FY14. Since then, there has been no
meaningful expansion in it. Gross margin on gasoline stands at INR 3.0/liter in FY16.
Exhibit 15: Marketing margin on gasoil up slightly
Source: PPAC, Elara Securities Research
Exhibit 16: Status quo on marketing margin on gasoline
Source: PPAC, Elara Securities Research
Changing rules of the game
Due to the supply glut in the export markets, there is an increased focus of non-OMC in the domestic market. MRPL has had the license to open upto 500 retail outlets and had not expanded earlier due to regulations. However, post deregulation it has obtained the Board’s approval to open upto 100 retail outlets. It is expected to formalize its retail entry strategy in the near term. Essar Oil (Not Listed) has already opened ~1,400 retail outlets. RIL has set up ~600 retail outlets. Business Standard states that RIL is offering discounts on auto fuels to attract volume.
Exhibit 17: Marginal growth in market share of gasoline for non-OMC
Source: Companies, Elara Securities Research
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(% o
f sal
es v
ol)
0
2
4
6
8
Ap
r-15
May
-15
Jun
-15
Jul-1
5
Au
g-1
5
Sep
-15
Oct
-15
No
v-15
Dec
-15
Jan
-16
Feb
-16
Mar
-16
(INR/
lit)
Gross marketing margin Gasoil Avg gross margin on Gasoil
1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Ap
r-15
May
-15
Jun
-15
Jul-1
5
Au
g-1
5
Sep
-15
Oct
-15
No
v-15
Dec
-15
Jan
-16
Feb
-16
Mar
-16
(INR/
lit)
Gross marketing margin Gasoline Avg gross margin on Gasoline
0%
20%
40%
60%
80%
100%
Q1F
Y15
Q2F
Y15
Q3F
Y15
Q4F
Y15
Q1F
Y16
Q2F
Y16
Q3F
Y16
IOCL BPCL HPCL Non-OMCs
Refining
10 Elara Securities (India) Private Limited
Exhibit 18: Marginal growth in market share of gasoil for non-OMC
Source: Companies, Elara Securities Research
Years of regulation had allowed OMC to expand their marketing and distribution networks across the country unabated. They also had been investing in newer
technologies and service standards. Now that the market has been deregulated, it has become a big entry barrier for non-OMC, which have not invested in setting up their marketing & distribution networks. Absence of product pipelines is also an issue. Hence, there has been a lot of pressure on the government to extend common carrier principle to product pipelines of OMC, especially ones that are under-utilized. In September 2015, Petroleum and Natural Gas Regulatory Board (PNGRB) came up with a draft notification identifying 24 product pipelines of IOCL, BPCL and GAIL, many of which are underutilized, and invited comments from companies as to why these pipelines should not be offered as a common carrier to other firms. If this were to happen, it would change the rules of the game in favor of large companies, such as RIL & Essar Oil, to the detriment of OMC.
0%
20%
40%
60%
80%
100% Q
1FY1
5
Q2F
Y15
Q3F
Y15
Q4F
Y15
Q1F
Y16
Q2F
Y16
Q3F
Y16
IOCL BPCL HPCL non-OMCs
Exhibit 19: Major product pipelines
Company Pipeline Length
(km) Capacity
((mmtpa) Utilization
((% in FFY15)
IOCL Barauni -Patna- Kanpur (including Gawaria-Lucknow branch line) 745 3.5 64.7
IOCL Guwahati –Siliguri 435 1.4 127.6
IOCL Haldia-Barauni (2) 526 1.3 96.4
IOCL Haldia-Mourigram-Rajbandh 277 1.4 130.6
IOCL Koyali-Ahmedabad 116 1.1 67.7
IOCL Koyali-Viramgam-Sidhpur-Sanganer 1,287 4.6 75.0
IOCL Koyali-Ratlam 265 2.0 7.4
IOCL Koyali-Dahej 197 2.6 50.7
IOCL Mathura-Tundla 56 1.2 79.8
IOCL Mathura-Bharatpur 21
IOCL Mathura-Delhi (including Bijwasan-Panipat pipeline) 258 3.7 70.6
IOCL Panipat-Amabala-Jalandhar (including Kurukshetra-Roorkee-Najibabad branch line) 434 3.5 66.7
IOCL Panipat-Delhi (including Sonepat-Meerut branch line) (1) 189 3.0 40.9
IOCL Panipat-Bathinda 219 1.5 89.7
IOCL Panipat-Rewari 155 2.1 72.1
IOCL Chennai-Trichy-Madurai 683 2.3 106.0
IOCL ChennaiI - Meenambakkam ATF 95 0.2 101.7
IOCL Chennai-Bengaluru 290 2.5 58.4
IOCL Digboi - Tinsukia 75 1.0 48.2
IOCL Devangonthi - Devanhalli 36 0.7 33.5
IOCL Panipat-Jalandhar LPG pipeline 274 0.7 68.1
BPCL Mumbai-Manmad-Bijwasan 1,389 6.0 103.8
BPCL Bina-Kota 259 4.4 53.4
BPCL ATF P/L Mumbai Refinery (MR)-Santacruz 15 1.4 46.9
BPCL ATF P/L Kochi Refinery (KR)-Kochi Airport 34 0.6 20.2
BPCL Kota - Jobner (1) 210 1.7 0.0
BPCL Mumbai-Uran (2) LPG pipeline 28 0.8 6.9
HPCL Mumbai-Pune-Solapur 508 4.3 82.9
HPCL Vizag-Vijayawada-Secunderabad 572 5.4 80.9
HPCL Mundra-Delhi 1,054 5.0 68.5
HPCL Ramanmandi-Bahadurgarh 243 4.7 61.6
HPCL Ramanmandi-Bathinda 30 1.1 56.5
HPCL Awa-Salawas (1) 93 2.3 0.9
HPCL Bahadurgarh-Tikrikalan (2) 14 0.8 1.1
GAIL Jamnagar-Loni LPG pipeline 1,414 2.5 93.0
GAIL Vizag-Secunderabad LPG pipeline 618 1.3 83.5
Petronet CCK Cochin-Coimbatore-Karur (CCK) 293 3.3 74.5
Source: PPAC, Elara Securities Research
Refining
Oil
& G
as
11 Elara Securities (India) Private Limited
Low oil prices a major boost
Deregulation along with low oil prices has led to debt levels almost halving at OMC during FY14-H1FY16. This is reflected in stock performance as well.
Exhibit 20: Decrease in debt Standalone net ddebt (INR mn)
FY13 FY14 FY15 H1FY16 Remarks
IOCL 778,219 779,906 495,987 483,486
BPCL 212,379 197,883 104,171 124,834
HPCL 323,111 318,953 170,386 186,773
MRPL 53,739 (18,188) (23,932) (39,706)
Outstanding payment to Iran is also included in cash
CPCL 56,662 54,062 43,592 35,311
RIL (233,600) 154,870 270,550 287,990 Huge capex distorts the debt levels
Source: Company, Elara Securities Research
INR 290bn capex to comply with BS VI norms
With the aim to curb rising vehicular pollution, the Central government has decided to skip BS-V emission norms and leapfrog directly to BS-VI norms across the country by April 2020. To become compliant with BS-V norms, investment envisaged prior to this directive was for ~INR 800bn. However, it includes ~INR 150bn for expansion & upgradation at the Numligarh Refinery and BPCL’s investment of ~INR 180bn for Kochi IREP. Individual PSU refineries have yet to plan capex roll-out for BS-VI compliance. However, as per the latest estimates of Petroleum Ministry, PSU refineries will need to invest ~INR 290bn to become compliant with BS-VI norms. India’s refineries had invested ~INR 300bn to become complaint with BS-III & IV norms.
Under-recoveries: gone or in hiding? Gasoil deregulation in October 2014 brought about a structural change in under-recoveries of OMC. Additionally, the government restricted access to subsidized LPG cylinders and introduced Direct Benefit Transfer (DBT) where it would directly compensate consumers for LPG cylinders. The government further came out with a subsidy-sharing formula for kerosene wherein it would bear upto INR 12/liter of subsidy while anything above that would be borne by upstream companies.
However, even in a low oil price environment, OMC have provided for net under-recoveries of INR 3bn in Q3FY16. This is cause for concern since it ignites memories of 2002-04 when even after deregulating prices of gasoline and gasoil, prices were again regulated once oil prices rose. If OMC were forced to bear under-recoveries, HPCL would be the worst affected as it has the highest leverage to marketing.
Exhibit 21: Net under-recoveries of OMC
Source: Company, Elara Securities Research
Valuation: IOCL and MRPL are our top picks
We have used EV/EBITDA to value the core refining and marketing businesses. We then have added the value of investments and other businesses. For RIL, we have used an EV/EBITDA of 6x, while for IOCL, BPCL, HPCL, MRPL and CPCL, we have used 5.5x to account for uncertainties associated with their businesses.
We expect RIL EBITDA to increase from INR 316bn in FY15 to INR 452bn in FY18E, led by core expansion. Our research shows contribution of expansion will be USD 1.6bn on full utilization of the new units. Even if we assume an increase of 25% annually in EBITDA from the shale segment, we expect negative valuation, even at an EV/EBITDA of 7x. While our Telecom Analyst Aliasgar Shakir suggests a negative valuation for telecom, we ascribe nil value for the telecom business on a more conservative note. We downgrade RIL to SSell rating with a new target of INR 966 from INR 1,070.
Of the three OMC, our conviction is the strongest for IOCL, which we believe will benefit from the commissioning of the Paradip refinery. We reiterate our Buy rating with a new target price of INR 599 from INR 607. Due to the recent run-up in the stock, we downgrade BPCL to RReduce from Buy with a new target price of INR 909 from INR 1,006. We revise our rating for HPCL to RReduce from Buy with a new target price of INR 875 from INR 1,016.
MRPL has started showing an improvement in its core performance. OMPL is also likely to stabilize from FY17. We reiterate our BBuy rating with a target price of INR 90.
CPCL has a debt-equity ratio of 2.1x due to large debt on books. It is also implementing INR 34bn capex (residue upgradation project and replacement of the existing crude oil pipeline), which will take time to yield results. We revise our rating to Sell from Reduce with an unchanged target price of INR 149.
(5,000)
0
5,000
10,000
15,000
20,000
25,000
FY12 FY13 FY14 FY15 9MFY16
(INR
mn
)
IOC BPCL HPCL
Refining
12 Elara Securities (India) Private Limited
Exhibit 22: Valuation summary Company CMP (INR) Target (INR) Upside (%) Rating Valuation (FY18E)
RIL 1,066 966 (9) Sell 6.0x EV/EBITDA
IOCL 416 599 44 Buy 5.5x EV/EBITDA
BPCL 926 909 (2) Reduce 5.5x EV/EBITDA
HPCL 850 875 3 Reduce 5.5x EV/EBITDA
MRPL 67 90 34 Buy 5.5x EV/EBITDA
CPCL 202 154 (24) Sell 5.5x EV/EBITDA
Source: Elara Securities Estimate
Exhibit 23: Change in estimates for Reliance Industries
(INR mn) Old NNew ((%) change
FY17E FY18E FY17E FY18E FY17E FY18E
EBITDA 356,251 415,725 377,035 452,033 5.8 8.7
PAT 231,669 261,376 249,278 293,668 7.6 12.4
EPS (INR) 78.9 89.0 84.9 100.0 7.6 12.4
Target price (INR) 1,070 966 (9.7)
Rating Reduce Sell
Source: Elara Securities Estimate
Exhibit 24: Change in estimates for IOCL
(INR mn) Old NNew ((%) change
FY17E FY18E FY17E FY18E FY17E FY18E
EBITDA 275,546 304,185 268,350 303,366 (2.6) (0.3)
PAT 141,667 159,138 136,869 158,592 (3.4) (0.3)
EPS (INR) 58.4 65.5 56.4 65.3 (3.5) (0.3)
Target price (INR) 607 599 (1.3)
Rating Buy Buy
Source: Elara Securities Estimate
Exhibit 25: Change in estimates for BPCL
(INR mn) Old NNew (%) change
FY17E FY18E FY17E FY18E FY17E FY18E
EBITDA 90,373 111,966 89,727 111,616 (0.7) (0.3)
PAT 54,117 66,627 51,991 64,254 (3.9) (3.6)
EPS (INR) 74.8 92.1 71.9 88.9 (3.9) (3.5)
Target price (INR) 1,006 909 (9.6)
Rating Buy Reduce
Source: Elara Securities Estimate
Exhibit 26: Change in estimates for HPCL
(INR mn) Old NNew ((%) change
FY17E FY18E FY17E FY18E FY17E FY18E
EBITDA 70,988 73,868 71,450 74,102 0.7 0.3
PAT 31,343 31,976 31,651 32,132 1.0 0.5
EPS (INR) 92.6 94.4 93.5 94.9 0.9 0.5
Target price (INR) 1,016 875 (13.9)
Rating Buy Reduce
Source: Elara Securities Estimate
Refining
Oil
& G
as
13 Elara Securities (India) Private Limited
Risks to our call Strengthening refining margin is the biggest risk to our call. However, looking at the upcoming capacities and persistent lack of demand, it is very unlikely that refining margins will strengthen. Expansion of marketing margins on auto fuels could further strengthen profitability of OMC. Rise in LNG prices could boost profitability of petcoke gasifier and ROGC for RIL. However, LNG supply is increasing by ~60% in next 2-3 years while demand
growth would be subdued in light of restart of nuclear reactors in Japan and Korea. Hence, likelihood of increase in LNG prices is low. RJio could again be a game changer if it grabs higher market share than estimated. Slower than expected ramp up of Paradip refinery could be a risk for IOCL. However, we have already taken a lower utilization of 30% in FY17 and 70% in FY18 and see a lower possibility of this risk playing out.
Exhibit 27: Change in estimates for MRPL
(INR mn) Old NNew ((%) change
FY17E FY18E FY17E FY18E FY17E FY18E
EBITDA 39,906 39,793 40,799 40,245 2.2 1.1
PAT 20,337 20,808 20,959 20,973 3.1 0.8
EPS (INR) 10.5 10.8 10.9 10.9 3.4 0.6
Target price (INR) 90 90 0.0
Rating Buy Buy
Source: Elara Securities Estimate
Exhibit 28: Change in estimates for CPCL
(INR mn) Old NNew ((%) change
FY17E FY18E FY17E FY18E FY17E FY18E
EBITDA 9,925 13,043 9,925 13,043 0.0 (0.0)
PAT 2,763 3,952 2,763 3,952 (0.0) 0.0
EPS (INR) 18.6 26.5 18.6 26.5 (0.3) 0.1
Target Price (INR) 149 154 3.6
Rating Reduce Sell
Source: Elara Securities Estimate
Refining
14 Elara Securities (India) Private Limited
Notes
Glo
bal
Mar
kets
Res
earc
h
Elara Securities (India) Private Limited
Swarnendu Bhushan • [email protected] • +91 22 6164 8504 Durgesh Poyekar • [email protected] • +91 22 6164 8541
Likely to suffer the most Refining margin to wither
We believe Reliance Industries (RIL IN) will suffer the most once refining margin comes off from the highs of 2015. An overwhelming dependence on exports for placement of ~70% of its refined products leaves it vulnerable to increased competition in the exports market, particularly from the Middle East refiners, due to close proximity to Africa & Europe. Low LNG prices would cap benefits from its petcoke gasifier to a mere USD 0.4/bbl improvement in refining margin.
Total increment of only USD 1.6bn from core projects
All core projects of ~USD 15bn would result in an annual incremental EBITDA of only USD 1.6bn. That too would be affected, if petrochemical margin were to fall post commissioning of new ethylene capacity in the US or from a further dip in LNG prices. While ethane imports provide a feedstock option for its petrochemical segment, its economic attractiveness has declined, in our view.
Shale remains a dampener
Several companies have written off investments in shale assets in the US, due to a fall in realization. At a cumulative investment of USD 8.7bn, RIL had posted an EBITDA of USD 58mn in Q3FY16. EBITDA stood at USD 1.1/mcfe in Q3FY16, which suggests it would incur EBIT losses considering high depreciation. Even if we assume 25% annual growth in EBITDA for 9MFY16, the segment indicates a loss per share of INR 60 at 7x EV/EBITDA.
Telecom may erode value
Even if Reliance Jio achieves a market share of 10% by FY19E, Elara Telecom Analyst Aliasgar Shakir says high capex and low realization may result in a negative NPV. EBITDA would break-even only in the third year of operations.
Valuation –downgrade to Sell with a new TP of INR 966
Refining contributes 70% of RIL’s EBIT. Given our concerns on refining margin, we believe refining EBITDA will decline from FY16. Attempts to push products in the domestic market may see further compression of refining margin through cross-subsidization. The telecom segment remains cause for concern with possible value erosion of ~INR 110 in a base case scenario. Even if we set aside value erosion in Reliance Jio, we arrive at a new SOTP-based target price of INR 966 from INR 1,070, after valuing core refining and petrochemical segments at 6x (unchanged) FY18E EV/EBITDA.
India l Oil & Gas 21 April 2016
Thematic Report/Target price/Rating change
Reliance Industries
Rating: Sell Target Price: INR 966 Downside: 9% CMP: INR 1,066 (as on 13 April 2016)
Key data*
Bloomberg /Reuters Code RIL IN/ RELI.BO
Current /Dil. Shares O/S (mn) 3,240/3,240
Mkt Cap (INR bn/USD mn) 3,454/51,833
Daily Vol (3M NSE Avg) 4,185,949
Face Value (INR) 10
1 USD = INR 66.6
Note: *as on 13 April 2016; Source: Bloomberg
Price & volume
Source: Bloomberg
Shareholding (%) Q1FY16 Q2FY16 Q3FY16 Q4FY16
Promoter 45.2 45.2 46.7 45.2
Institutional Investors 31.7 31.8 32.9 32.3
Other Investors 12.8 12.8 10.3 12.8
General Public 10.3 10.3 10.2 9.8
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 3.1 (4.5) (11.8)
Reliance (1.0) 19.3 15.6
Cairn 23.6 (5.9) (31.8)
ONGC (4.4) (16.0) (31.6)
Source: Bloomberg
Standalone key Financials YE March
Revenue (INR bn)
YoY (%)
EBITDA (INR bn)
EBITDA margin (%)
Adj PAT (INR bn)
YoY (%)
Fully DEPS (INR)
RoE (%)
RoCE (%)
P/E (x)
EV/EBITDA (x)
FY15 3,291 (15.6) 316 9.6 227 3.3 77.4 11.0 6.1 13.7 13.2 FY16E 2,402 (27.0) 407 16.9 276 21.7 94.2 12.1 7.8 11.3 10.3 FY17E 2,376 (1.1) 377 15.9 250 (9.5) 85.2 10.0 6.6 12.4 11.1 FY18E 2,676 12.6 452 16.9 294 17.3 100.0 10.7 7.7 10.6 9.3
Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
0
5
10
15
20
750
850
950
1,050
1,150
Apr-15 Aug-15 Dec-15 Apr-16
Vol. in mn (RHS) Reliance Industries (LHS)
Reliance Industries
16 Elara Securities (India) Private Limited
Standalone Financials (YE March) Financials (YE March) FY15 FY16E FY17E FY18E
Income Statement (INR bbn)
Net operating income 3,291 2,402 2,376 2,676
EBITDA 316 407 377 452
Depreciation 85 90 96 107
Forex loss 0 0 0 0
EBIT 231 317 281 345
Interest cost 24 39 37 34
Other income 87 77 77 65
PBT 295 354 321 376
Less: taxation 67 78 71 83
Effective tax rate (%) 22.9 22.0 22.0 22.0
PAT 227 276 250 294
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity Capital 32 32 32 32
Reserves 2,129 2,366 2,580 2,831
Total Borrowings 891 850 800 700
Deferred Taxes 127 127 127 127
Total Liabilities 3,180 3,375 3,539 3,690
Fixed Assets 1,903 2,085 2,258 2,287
Investments 1,126 1,126 1,126 1,126
Inventories 366 255 218 236
Debtors 47 34 34 38
Cash 116 88 98 326
Loans & Advances 416 262 269 202 Other Current Assets 0 0 0 0 Net Current Assets 151 165 155 278 Total Assets 3,180 3,375 3,539 3,690
Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating Cash Flow 491 325 367 505
Capex (477) (272) (270) (136)
Free cash flow to firm 14 53 97 370
Investing cash flow (742) (272) (270) (136)
Financing cash flow 0 (81) (86) (142)
Net change in cash (251) (28) 11 227
Opening cash 366 116 88 98
Closing cash 116 88 98 326
Ratio Analysis FY15 FY16E FY17E FY18E
Income Statement Ratios (%)
Revenue growth (15.6) (27.0) (1.1) 12.6
EBITDA growth 2.7 28.8 (7.4) 19.9
PAT growth 3.3 21.7 (9.5) 17.3
EBITDAM 9.6 16.9 15.9 16.9
PAT margin 6.7 11.2 10.2 10.7
Return & liquidity ratios
Interest/PBIT (x) 0.1 0.1 0.1 0.1
Net debt/Equity (x) 0.2 0.2 0.1 0.0
ROE (%) 11.0 12.1 10.0 10.7
ROCE (%) 6.1 7.8 6.6 7.7
Per share data & valuation ratios
EPS (INR) 77.4 94.2 85.2 100.0
EPS growth (%) 3.3 21.7 (9.5) 17.3
Book Value (INR) 736.2 816.8 889.7 975.3
DPS (INR) 10.0 11.6 10.5 12.3
P/E (x) 13.7 11.3 12.4 10.6
EV/EBITDA (x) 13.2 10.3 11.1 9.3
Price/Book (x) 1.4 1.3 1.2 1.1
Dividend Yield (%) 0.9 1.1 1.0 1.2
Note: pricing as on 13 April 2016; Per share calculation excludes treasury shares. Net debt calculation includes current investments. Source: Company, Elara Securities Estimate
Revenue & margin growth trend
Source: Company, Elara Securities Estimate
Adjusted profit growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
9.6
16.9 15.9
16.9
0.0
5.0
10.0
15.0
20.0
0
1,000,000
2,000,000
3,000,000
4,000,000
FY15 FY16E FY17E FY18E
(%)
(INR
mn
)
Net revenues (LHS) EBITDA Margin (RHS)
3.3
21.7
(9.5)
17.3
(20)
(10)
0
10
20
30
40
(100,000)
0
100,000
200,000
300,000
400,000
FY15 FY16E FY17E FY18E
(%)
(INR
mn
) Adj PAT (LHS) PAT Growth (RHS)
6.1
7.8
6.6
7.7
11.0
12.1
10.0 10.7
5.0
7.0
9.0
11.0
13.0
FY15 FY16E FY17E FY18E
(INR
mn
)
ROCE (%) ROE (%)
Reliance Industries
Oil
& G
as
17 Elara Securities (India) Private Limited
Concerns remain; limited upside Limited upside from petcoke gasification
The purpose of a petcoke gasifier is to replace LNG as a source of energy (power & steam) with synthetic gas produced from cheap petcoke, a product of the refinery. However, LNG prices have cracked from the highs of USD 20/mmBtu in early 2014 to below USD 5/mmBtu currently. This limits benefits of the petcoke gasifier project.
Exhibit 1: Petcoke gasifier economics
Composition of synthesis gas (bcm/year)
Cogen fuel 5.1 used for power+steam
Hydrogen 1.3 Synthetic NG 1.1 feed to new cracker
Heater fuel 0.4 fuel all new process heaters
CO 0.2 feed to acetic acid plant
Total 8.0 24mmscmd considering 330days/year
Source: Company, Elara Securities Research
Savings potential
The petcoke gasifier replaces ~10mmscmd of LNG currently being used in the refinery & petrochemical setup. In addition to servicing increased power requirement of the expansion, it frees off-gases, which can be used as feedstock in the refinery’s off-gas cracker unit (ROGC). An easy way to calculate savings is to calculate the replacement cost of ~10mmscmd of LNG and load it onto the refining segment to calculate the increase in GRM. This coupled with the advantage of almost nil cost of feedstock for the ROGC gives full potential of the gasifier as well as the ROGC.
Exhibit 2: Building savings model
Source: Elara Securities Research
Improvement in GRM
At a LNG price of USD 7.5/mmBtu, we estimate GRM improvement will be USD 0.4/bbl. A minimum of USD 6.0/mmBtu LNG price is required for incremental value from the petcoke gasifier.
Exhibit 3: GRM breakdown Production economics Petcoke consumed mn tonnes 9.8 Petcoke cost INR/tonne 4,000
USD/tonne 61 Feedstock cost USD mn 594 Production (NG equivalent) Bcm 3.3
TrBtu 119 Output price USD mn 1,088 Opex USD/mmBtu 2.4
USD mn 285 EBITDA USD mn 209 Throughput mn tonnes 68
Improvement in GRM USD/bbl 0.4
Conversions Exchange rate USD-INR 66 LNG USD/mmBtu 9.2
TrBtu/1 bcm of NG 36
Price build up of LNG from FOB
FOB USD/mmBtu 7.5 Shipping USD/mmBtu 0.3 Customs % 5.0
USD/mmBtu 0.4 Regas charges USD/mmBtu 0.5 Transmission charges USD/mmBtu 0.5
Gate price USD/mmBtu 9.2
Source: Company, Elara Securities Estimate
Low LNG prices would keep savings in check
Global LNG trade in 2015 stood at 245mn tonnes. However, Japan, the largest importer, is likely to see a decrease in demand once its nuclear reactors come online. Additionally, a total of ~140mmtpa of new liquefaction capacity is coming onstream in the next few years. This is expected to put LNG prices under pressure even if oil prices rise. As a result, savings potential of the petcoke gasifier would remain suppressed for a long time.
Exhibit 4: Supply increasing ~60% of total trade by FY16
Source: International Gas Union, Elara Securities Research
0
100
200
300
400
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
E
(mn
ton
nes
)
Liquefaction Capacity Actual Trade
Huge capacity addition led by Australia
Emergence of new demand centers amid low LNG prices; restart of nuclear reactors in
Japan cause for concern
Petcoke gasifier
Power requirement for the expanded
setup
Ref off-gases
Replacement of current
consumption of LNG for refinery
LNG for existing petrochemical
Feedstock for ROGC
Load it onto refining to estimate improve-
ment in GRM
Almost nil feedstock cost
for ROGC
31
7
3
4
24
14
Reliance Industries
18 Elara Securities (India) Private Limited
Refining EBITDA likely to decline
Our calculations show a boost to refining of ~USD 0.4/bbl because of petcoke gasifier. We estimate an increase in refining EBITDA of only 6% in FY18 over FY15, even after contribution from petcoke gasifier. We expect RIL GRM ex-petcoke gasifier will reduce because of 1) increased competition in the exports market, 2) absorption of freight to remain competitive in exports, and 3) continued exports to regions, which require low-quality products (and thus low realization).
Exhibit 5: FY16 looks the brightest
FY15 FY16E FY17E FY18E
Throughput (mn tonnes) 67.9 68.7 68.0 68.0
GRM (USD/bbl) 8.6 10.5 8.4 8.8
USD-INR 61.4 64.6 67.2 68.0
EBITDA (INR mn) 187,250 245,746 186,525 199,224
Source: Company, Elara Securities Estimate
Almost nil feedstock cost for ROGC
The 1.365mn tonne pa new ethylene plant would be fed from the refinery off-gases, which would come at almost nil cost. Instead, the ROGC would have used ~4mmscmd of LNG. We calculate savings in ROGC, due to the petcoke gasifier, will stand at USD 481mn.
Exhibit 6: Savings in ROGC
Feedstock to ROGC
mmscmd 4
mmscm 1,460
mmBtu 52,560,000
Saving USD mn 481
Source: Elara Securities Estimate
Full potential of gasifier/ROGC/new products
In addition to USD 209mn estimated for refining and USD 481mn in savings from almost nil feedstock cost to ROGC, ROGC & downstream crackers would generate USD 936mn of EBITDA at current rates. All together, we estimate a boost of USD 1,627mn as a result of the petcoke gasifier and ROGC & downstream projects.
Exhibit 7: EBITDA calculations
FY13 FY14 FY15 9MFY16
Estimated pdt sales (tmt)* 7,511 7,548 7,475 6,069
EBITDA (USD mn) 1,765 1,820 1,915 1,608
EBITDA (USD/tonne) 235 241 256 265
*Excluding internal consumption; Source: Elara Securities Research
Exhibit 8: Total boost to EBITDA
Increase in refining EBITDA (USD mn) [A] 209
Saving due to almost nil feedstock cost (USD mn) [B] 481
Average 3yr petchem EBITDA (USD/tonne) 250
Increase in petchem EBITDA due to new vol (USD mn) [C] 936
Total increase in EBITDA (USD mn) [A+B+C] 1,627
Source: Elara Securities Estimate
Petchem EBITDA gets a major boost
Segment-wise EBITDA is likely to almost double during FY15-18E, due to savings from ROGC being fed on refinery off-gases instead of LNG & expansion in petrochemical production capacity.
Exhibit 9: Almost doubling of petrochemicals EBITDA
FY15 FY16E FY17E FY18E
Sales (mn tonnes) 7.5 8.0 9.4 11.3
Margin (USD/tonne) 256 259 250 250
Saving due to ROGC (USD mn) 481
USD-INR 61.4 64.6 67.2 68.0
EBITDA (INR mn) 117,570 134,254 157,233 224,704
Source: Company, Elara Securities Estimate
Margin threat from ethylene expansion
Due to availability of cheap and abundant shale gas, North America is adding ~8.5mn tonne pa of new polyethylene capacity to its existing capacity of ~20mn tonne pa. This low-cost expansion is likely to keep petrochemical margin under pressure.
Exhibit 10: Polyethylene projects in North America
Company Capacity (mtpa) Grades Location Start-up
US Projects
Sasol / INEOS 470,000 HDPE Texas 2016
ExxonMobil 1,300,000 mLLDPE, LLDPE Texas 2017
LyondellBasell 454,000 Unspec US 2017
Chevron Phillips
1,000,000 HDPE (500kt), LLDPE (500kt)
Texas 2017
Dow Chemical 750,000 PE (ELITE 400kt), LDPE (350kt)
Texas 2017
Formosa Plastics
1,090,000 LDPE (567kt), PE unspec (535kt)
Texas 2017
Sasol / INEOS 900,000 LLDPE, LDPE Louisiana 2018
Shell 1,600,000 HDPE/LLDPE (550 kt, 2 unites), HSPE (500 kt) Pennsylvania 2018
Mexico and Canada Projects Nova Chemicals 454,000 LLDPE Canada 2016
Nova Chemicals 470,000 Unspec
North America, World
NA
Source: ICIS, Elara Securities Research
Ethane project dampener too
When oil prices were low, ethane offered attractive saving potential compared to naphtha for petrochemical production. However, with reduction in oil prices, ethane has lost its attractiveness to naphtha. Nonetheless, it provides access to diverse feedstocks for the petrochem segment.
Shale segment another albatross
As oil prices fell since late-2014, we have witnessed huge write-offs in shale assets in the US. It is estimated nearly 40% of shale reserves there would be written off if oil prices were to remain low.
Reliance Industries
Oil
& G
as
19 Elara Securities (India) Private Limited
Exhibit 11: Major write-offs since 2015
Company Date Impairment ((USD bn) Remarks
BHP Billiton Jan-16 10.3 USD 10.3bn write-down on its US shale oil and gas assets
EQT Corp Feb-15 0.16 EQT writes off its USD 162mn Utica Shale holdings in Ohio
Statoil Apr-15 4.0 USD 4bn write-down on its US shale oil and gas assets
Shell Aug-14 1.9 Shell writes-off USD 1.9bn in US shale assets
Chesapeake Energy Aug-15 4.0 USD 4bn on its acreages in August
Whiting Petroleum
Aug-15 0.87 Whiting Petroleum took an USD 870mn hit over its takeover of Kodiak Oil and Gas
Whiting Petroleum Nov-15 2.57
Write down of USD 1.7bn in Texas Assets and USD870mn for goodwill for Kodiak
Devon Energy Mar-15 5.5 US assets
Chesapeake Energy
Mar-15 5.0 US assets
Source: Companies, Elara Securities Research
We have seen RIL realization from its shale assets declining to USD 2.4/mcfe in Q3FY16 from an average of USD 6.5/mcfe in FY14 and USD 5.1/mcfe in FY15. EBITDA/mcfe has fallen to USD 1.1 in Q3FY16 from USD 4.1 in FY14 and USD 3.3 in FY15. Although depreciation cost is not available for RIL, a study of comparative companies suggests a depreciation of ~USD 3.5/mcfe. This means RIL will be incurring a loss of USD 2.4/mcfe from its shale assets.
Exhibit 12: Profitability of shale assets
Source: Elara Securities Research
On a cumulative capex of USD 8.7bn, it generated an annualized EBITDA of USD 276mn, a return of ~3%. Low realization suggests RIL may take write-offs in its assets. Even if it does not, using a high EV/EBITDA of 7x also results in negative valuation of INR 60 for the shale segment.
Exhibit 13: Valuation of shale business (FY18E)
EV/EBITDA (x) 7
EV (USD mn) 3,019
EV (INR mn) 203,766
Debt (INR mn) 320,000
Valuation (INR) (60)
Source: Elara Securities Estimate
Delayed RJio launch
RJio’s delayed upcoming telecom service launch on pan-India basis is likely to happen at the beginning of FY17. Our channel checks show out of the planned 75,000 cell sites for pan-India coverage, RJIO has commissioned about 55,000 sites. The remaining sites are at some stage of frequency testing & commissioning, which is likely to get delayed to Q1-Q2FY17. Apart from this, there will be in-building network coverage planning in multiple large commercial premises in urban areas.
RJio is the first operator in the world to have full IP-based LTE network with no fallback of 2G & 3G network. While this allows the company to offer full-fledged high speed 4G network, RJIO’s network launch with just about ~75,000 cell sites on a combination of 2300-1800MHz spectrum may not be adequate compared to incumbents like Bharti Airtel (BHARTI IN, RRating: Accumulate, CMP: INR 359, TP: INR 380) operating with more than 150,000 2G and 75,000 3G cell sites over and above 4G sites.
Aggressive pricing to target market share
The new operator launch in 2008-09 indicates telecom companies have remained aggressive until they reach close to 60-70% capacity utilization as they prioritize volume over profitability to recover from perishable minutes. We expect RJio to remain irrational on pricing until it reaches about 60-70% capacity utilization. With a pan-India launch, our base case factors in a 11% subscriber market share over the first five years of operations by FY21, driven by low voice RPM of INR 0.20/min and data ARMB of INR 0.15/MB, respectively. This is at a 40-50% discount to current voice pricing of INR 0.33-35/min and data pricing of INR 0.25/MB offered by incumbent operators.
Exhibit 14: Voice RPM at a 40% discount to peers
Source: Elara Securities Estimate
2.0
3.0
4.0
5.0
6.0
7.0
8.0
50 70 90
110 130 150 170 190 210
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
16
2QFY
16
3QFY
16
EBITDA (USD mn) Avg realisation (USD/mcfe)-RHS
0.17
0.18
0.19
0.20
0.21
0
100
200
300
400
500
FY17
E
FY18
E
FY19
E
FY20
E
FY21
E
FY22
E
FY23
E
FY24
E
FY25
E
FY26
E
FY27
E
FY28
E
FY29
E
FY30
E
(INR/m
in)
(min
/mo
nth
)
MOU Voice RPM (INR/min) (RHS)
Reliance Industries
20 Elara Securities (India) Private Limited
Exhibit 15: Favorable data demand elasticity with 50% pricing discount
Source: Elara Securities Estimate
Exhibit 16: Likely high market share focus with free capacity
Source: Elara Securities Estimate
Likely EBITDA break-even in the third year
With data being the key proposition, we expect RJio to garner more than 70% revenue contribution from data unlike just 20% generated by current telcos. We believe RJio will remain a data provider, garnering INR 150 data ARPU with 1GB usage, ie, nearly 1.3-1.5x data usage per user compared to the current usage. Voice offered on VoLTE network may not be its mainstay, expecting weak network and low value proposition. We expect INR 60 voice ARPU with less than a 30% revenue contribution.
Our base case expects RJio’s EBITDA to break even in its third year of operations as it leverages its fixed cost led by network, subscriber acquisition & servicing and employee cost.
Exhibit 18: Base case – EBITDA break-even in 3 years
Source: Elara Securities Estimate
Investment IRR of only ~8%, below WACC
RJio has invested about INR 1,000bn in the past five years even before the launch of operations. We believe high capex will be the biggest dent on its returns. Our base case generates an IRR of ~8% despite factoring in a 30% EBITDA margin in the fifth year and more than 40% EBITDA margin by the seventh year of launch. This is led by 17.5% subscriber market share by the end of the license period in FY30E and a healthy INR 210 ARPU, better than the industry leader Bharti’s ARPU of INR 198. This does not include interest cost.
Our post tax project NPV at an 11% WACC works out to be –INR 82/share for the firm. To date, the company has taken on debt of INR 370bn for RJio. This gives a negative value of INR 200/share for equity valuation.
0.08 0.09 0.10 0.11 0.12 0.13 0.14 0.15 0.16
0
500
1,000
1,500
2,000
2,500
3,000
3,500 FY
17E
FY18
E
FY19
E
FY20
E
FY21
E
FY22
E
FY23
E
FY24
E
FY25
E
FY26
E
FY27
E
FY28
E
FY29
E
FY30
E
(INR/M
B)
(MB
/mo
nth
)
Data usage/user Data tariffs (INR/MB) (RHS)
0.00
0.05
0.10
0.15
0.20
0.25
0.30
FY1
6E
FY1
7E
FY1
8E
FY1
9E
FY2
0E
FY2
1E
FY2
2E
FY2
3E
FY2
4E
FY2
5E
FY2
6E
FY2
7E
FY2
8E
FY2
9E
FY3
0E
Base case Bear case Bull Case
(200)
(100)
0
100
200
300
400
500
600
FY16E FY17E FY18E FY19E FY20E FY21E
Base Case Bear Case Bull Case
Exhibit 17: Scenario analysis FY19 (three years from launch)
Subs mkt share (%)
Data revenue (INR mn)
Voice revenue ((INR mn)
EBITDA (INR mn)
EBITDAM (%) Break Even IRR
(%) NPV/share
@ 11%
Base 8 1,59,414 57,547 20,293 9 3rd year - FY19 8 (82)
Bear 5 72,234 39,114 (25,698) (23) 2nd year - FY18 (10) (350)
Bull 13 3,81,929 1,03,405 1,84,286 38 2nd year - FY21 18 318
Source: Elara Securities Estimate
Reliance Industries
Oil
& G
as
21 Elara Securities (India) Private Limited
Retail segment: strategy changing
RIL has increased its pan-India footprints by 37% over Q1FY14-Q3FY16 to 12.8mn sq ft. The number of stores has almost doubled from 1,511 in Q1FY14 to 3,043 in Q3FY16. However, growth has been seen only in digital and the fashion & lifestyle segments. The number of stores in the digital segment has increased 10x to 1,537 in Q3FY16 from those in Q1FY14, while the fashion & lifestyle segment has seen far slower growth, with the number of stores at 909 in Q3FY16 vs 591 in Q1FY14. There has been shrinkage in the value format segment,
with the number of stores falling from 769 in Q1FY14 to 597 in Q3FY16.
The focus of RIL is to expand faster in the digital segment, with high revenue potential as well having a sizeable presence in the high margin fashion & lifestyle segment and retreating from the loss-making value format segment.
Also, with competition from eCommerce heating up, RIL is trying its hand at the eCommerce segment, especially in the fashion & lifestyle segment.
Exhibit 19: Base case scenario
3 years 5 years 10 years End of license period 14 years
Subs market share (%) 7.5 11.0 15.5 17.5 Subs base (mn) 89 139 208 234
Voice revenue (INR mn) 57,547 1,11,107 1,88,294 2,14,749
Voice ARPU (INR/month) 66 71 77 77
Voice RPM (INR) 0.19 0.19 0.19 0.19
MOU (minutes/sub/month) 337 372 414 418
Voice traffic (mn minutes) 2,96,035 5,82,604 10,06,896 11,59,845 Data revenue (INR mn) 1,59,414 3,44,320 7,47,706 10,36,530
Data ARPU (INR/month) 182 220 308 374
Data RPM (INR) 0.13 0.13 0.12 0.12
Data usage per user (MB/month) 1,380 1,731 2,610 3,173
Data traffic (mn MB) 12,12,072 27,14,038 63,44,883 87,95,784
Total Revenue (INR mn) 2,16,961 4,55,427 9,36,000 12,51,278 Network Cost share 34% 23% 20% 20%
Spectrum and license costs 11% 11% 11% 11%
Access and Roaming Charge 12% 11% 10% 8%
Employee Expenses 10% 6% 5% 5%
Selling and admin costs 19% 11% 9% 8%
Ad exp 6% 3% 2% 2% EBITDA Margin 9% 34% 44% 45%
NPV @11% (2,63,648)
Per Share NPV (82)
IRR 8.2%
Source: Elara Securities Estimate
Exhibit 20: Stores breakdown category-wise (Q1FY14)
Exhibit 21: Stores breakdown category-wise (Q3FY16)
Source: Company, Elara Securities Research Source: Company, Elara Securities Research
Digital, 151
Fashion & Lifestyle,
591
Value, 769
Digital, 1,537
Fashion & Lifestyle,
909
Value, 597
Reliance Industries
22 Elara Securities (India) Private Limited
Revenue has grown 1.7x to INR 60,420mn in Q3FY16 vs INR 35,000 in Q1FY14 while EBITDA has grown 3.5x to INR 2,430mn in Q3FY16 vs INR 700mn that in Q1FY14. EBITDA margin has improved steadily from 2% in Q1FY14 to 4% in Q3FY16 as RIL increase its presence in the digital and fashion & lifestyle segments and decreased its presence in the value format segment.
Exhibit 24: Revenue and EBITDA margin trend
Source: Company, Elara Securities Research
We assume sales growth of 20% during FY16-18E and value the retail segment at INR 72 on 0.7x FY18E sales of INR 304bn.
Valuation: downgrade to Sell with a new TP of INR 966
We remain concerned on the company’s ability to generate good refining margin, due to 1) concerns on benchmark refining margin, 2) increasingly competitive exports market, that too in regions which consume Euro-II or low, 3) limited benefits from core sector expansion, and 4) concerns over telecom. As a result, we downgrade RIL to SSell with a new target of INR 966 from INR 1,070) based on a SOTP valuation.
Exhibit 25: Valuation of RIL
INR Remarks
Refining 407 6x FY18E EBITDA
E&P 55 Includes (INR 60) for shale, valued at 7x FY18E EBITDA
Petrochem 459 6x FY18E EBITDA
Investments/RGTIL 32
Reliance Retail 72
Infotel 0 (INR 200) as per out Telecom Analyst
Total 1,025
Net debt / (cash) 59
Target price 966
Source: Elara Securities Estimate
Exhibit 26: Major assumptions
FY15 FY16E FY17E FY18E
Refining Throughput (mn tonne) 67.9 68.7 68.0 68.0
GRM (USD/bbl) 8.6 10.5 8.4 8.8
E&P KG D6 gas (mmscmd) 12.3 11.1 9.0 8.1
KG D6 oil (kbopd) 5.6 4.1 3.5 3.1
PMT PM gas (mmscmd) 5.5 5.2 4.8 4.3
PM oil (kbopd) 19.8 18.8 17.7 16.0
Tapti gas (mmscmd) 1.1 0.5 0.5 0.0
Petrochem -Polymers (kmt) 4,300 4,577 4,575 5,325
-Fibre intermediates (mmt) 4.9 6.4 8.3 9.5
-Polyester (kmt) 1,847 2,449 3,382 3,382
Petchem EBITDA per tonne (USD/tonne) 256 259 250 250
Source: Company, Elara Securities Estimate
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
16
2QFY
16
3QFY
16
(%)
(INR
mn
)
Revenue EBITDAM (RHS)
Exhibit 22: Revenue mix category-wise (Q1FY14) Exhibit 23: Revenue mix category-wise (Q3FY16)
Source: Company, Elara Securities Research Source: Company, Elara Securities Research
Digital, 19
Fashion & Lifestyle, 26
Value, 55
Digital, 28
Fashion & Lifestyle, 25
Value, 47
Reliance Industries
Oil
& G
as
23 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
08-Jan-2014 Reduce INR 884 INR 849
2
17-Jan-2014 Reduce INR 887 INR 885
3
17-Apr-2014 Sell INR 887 INR 959
4
18-Jul-2014 Reduce INR 953 INR 977
5
27-Aug-2014 Reduce INR 955 INR 996
6
13-Oct-2014 Reduce INR 950 INR 958
7
16-Jan-2015 Accumulate INR 991 INR 867
8
8-Jul-2015 Accumulate INR 971 INR 997
9
24-Jul-2015 Reduce INR 1,016 INR 1,025
10
16-Oct-2015 Accumulate INR 1,076 INR 912
11
19-Jan-2016 Reduce INR 1,070 INR1,044
12
13-Apr-2016 Sell INR 966 INR 1,066
Guide to Research Rating BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
1
2
3 4 5 6
7
8 9
10
11 12
600
700
800
900
1,000
1,100
1,200
Jan
-12
Feb
-12
Mar
-12
Ap
r-12
M
ay-1
2 Ju
n-1
2 Ju
l-12
Au
g-1
2 Se
p-1
2 O
ct-1
2 N
ov-
12
Dec
-12
Jan
-13
Feb
-13
Mar
-13
Ap
r-13
M
ay-1
3 Ju
n-1
3 Ju
l-13
Au
g-1
3 Se
p-1
3 O
ct-1
3 N
ov-
13
Dec
-13
Jan
-14
Feb
-14
Mar
-14
Ap
r-14
M
ay-1
4 Ju
n-1
4 Ju
l-14
Au
g-1
4 Se
p-1
4 O
ct-1
4 N
ov-
14
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-15
M
ay-1
5 Ju
n-1
5 Ju
l-15
Au
g-1
5 Se
p-1
5 O
ct-1
5 N
ov-
15
Dec
-15
Jan
-16
Feb
-16
Mar
-16
Ap
r-16
Not Covered Covered
Reliance Industries
24 Elara Securities (India) Private Limited
Notes
Glo
bal
Mar
kets
Res
earc
h
Elara Securities (India) Private Limited
Swarnendu Bhushan • [email protected] • +91 22 6164 8504 Durgesh Poyekar • [email protected] • +91 22 6164 8541
IOCL: best pick among OMC OMC losing handle on marketing margin
Marketing margin on auto fuels have not expanded significantly, which is in line with our assumption and against Consensus view. We estimate net marketing margin on gasoil has increased from 70p/liter prior to deregulation in October 2014 to INR 1.1/liter in FY16. Net marketing margin on gasoline, which was deregulated in June 2010, also appears to stand at INR 1.5/liter, slightly higher than INR 1.4/liter in FY14. As Street reconciles its long held unfounded expectation on marketing margins with reality, we expect derating of OMC. In such a scenario, IOCL which is leveraged the least to marketing, stands to benefit the most.
IOCL GRM to rise despite benign refining environment
We believe commissioning of IOCL’s 15-mn-tonne pa Paradip refinery with a high complexity of 12.2 will increase overall GRM. BPCL is expected to post a GRM increase due to a 6-mn-tonne pa expansion and complexity rise at the Kochi refinery. However, HPCL’s GRM is likely to suffer contraction in a benign refining environment.
Under-recoveries rears its ugly head
After gasoil was deregulated, the government introduced direct benefit transfer (DBT) for LPG. It also agreed to bear upto INR 12/liter of subsidy on kerosene and the rest by upstream companies. However, in Q3, OMC collectively borne net under-recoveries of INR 3bn. While this is insignificant, it raises doubts on whether deregulation on gasoil and gasoline will continue if oil prices rise further. This puts HPCL at the highest risk as it is the most leveraged to marketing.
E&P, once jewel in the crown for BPCL, is now a lemon
Among OMC, BPCL is the one with the largest diversification in E&P, with several assets in Brazil and Mozambique. However, with oil prices having crashed and Petrobras, operator of its Brazil blocks, trying to emerge out of its corporate governance issues, it has put monetization of its assets at risk. Additionally, LNG prices also have tumbled. This has put the Mozambique investment at risk.
Valuation – IOCL is the top pick
We value IOCL at 5.5x FY18E EV/EBITDA. We lower the multiple for BPCL & HPCL from 6.0x to 5.5x due to rising concerns on marketing margin and likely under-recoveries. We reiterate BBuy on IOCL with a new TP of INR 599. We downgrade HPCL and BPCL to Reduce with new target of INR 875 and INR 909 respectively.
India l Oil & Gas 21 April 2016
Thematic Report/Target price/Rating change
Oil Marketing Companies
GRM trend of OMCs
Source: Companies, Reuters
Marketing margin trend of OMCs
Source: Companies
Price performance of OMCs
Source: Bloomberg
Key Financials Company EV/EBITDA (x) P/E (x) ROE (%)
FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
IOCL 14.7 6.6 5.9 5.2 28.4 8.2 7.5 6.5 7.8 17.9 16.0 16.5
BPCL 9.4 7.8 8.7 7.0 13.2 11.4 12.9 10.4 24.3 24.2 18.8 20.6
HPCL 8.5 6.7 6.7 6.5 10.6 8.6 9.2 9.0 17.6 19.8 16.5 15.2
1 USD = INR ; Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
(8)
(4)
0
4
8
12
1Q
FY1
4
2Q
FY1
4
3Q
FY1
4
4Q
FY1
4
1Q
FY1
5
2Q
FY1
5
3Q
FY1
5
4Q
FY1
5
1Q
FY1
6
2Q
FY1
6
3Q
FY1
6
(USD
/bb
l)
Singapore GRM IOCL BPCL HPCL
0
1
2
3
4
5
6
7
Ap
r-15
May
-15
Jun
-15
Jul-1
5
Au
g-1
5
Sep
-15
Oct
-15
No
v-15
Dec
-15
Jan
-16
Feb
-16
(INR/
lit)
Gross marketing margin Diesel
Gross marketing margin Petrol
70
85
100
115
130
145
Ap
r-15
May
-15
Jun
-15
Jul-1
5
Au
g-1
5
Sep
-15
Oct
-15
No
v-15
Dec
-15
Jan
-16
Feb
-16
Mar
-16
Ap
r-16
No
rmal
ized
Nifty IOCL BPCL HPCL
Oil Marketing Companies
26 Elara Securities (India) Private Limited
Sifting for winners Marketing margin expansion: where is it?
Post deregulation of gasoil, it was widely believed OMC would be given the autonomy to price auto fuels and they would see expansion in marketing margin. Although there have been a periodic spike in margin, this rise was to cover incremental cost or inventory losses. We have yet to see any meaningful and consistent expansion in marketing margin. Data suggests marketing margin has barely improved, with gross marketing margin in gasoil averaging INR 2.6/litre in FY16 vs INR 2.3-2.4/liter during regulation while gross marketing margin for gasoline stood at INR 3.0/liter in FY16, the same as that in FY14.
Exhibit 1: Marketing margin trend
Source: PPAC, Elara Securities Research
HPCL’s leverage to marketing margin is the highest, followed by BPCL and IOCL. For the same reason, we believe no major expansion in marketing margin may result in further downgrade of HPCL and BPCL.
IOCL marketing to contribute 31% of FY18E EBITDA
We estimate the company will sell 44.8bn liters of gasoil and 14.7bn liters of gasoline in FY18. We assume a net marketing margin of INR 1.05/liter for gasoil and INR 1.58/liter for gasoline. IOCL would further sell 26mn tonnes of other products, on which it would gain 78p/kg. We estimate a total of INR 90bn from marketing, which is 31% of total EBITDA in FY18.
Exhibit 2: Our marketing EBITDA calculation (FY18E)
Sale of gasoil
Sale of gasoline
Other products (mn tonne))
Volume sold (bn lit) 44.8 14.7 25.99
Net marketing margin (INR/lit); INR/kg for other products)
1.05 1.58 0.78
Marketing EBITDA (INR mn) 47,047 23,196 20,272
Source: Elara Securities Estimate
HPCL has the highest leverage to marketing
We estimate HPCL’s marketing margin will contribute 59% of total EBITDA in FY18E. Against this, marketing
accounts for only 31% and 46% for IOCL and BPCL, respectively. It also threatens HPCL if the government decides to regulate auto fuels again in a rising oil price environment.
Exhibit 3: Marketing margin contribution
Marketing as % of total EBITDA FY18E
IOCL 31
BPCL 46
HPCL 59
Source: Elara Securities Estimate
GRM to come under pressure
Singapore GRM stood at USD 7.5/bbl of GRM in FY16 vs USD 6.4/bbl in FY15 and USD 5.6/bbl in FY14. Increased demand for auto fuels, naphtha for gasoline blending & petrochemical feed stocks and low fuel & loss helped prop up GRM in 2015. Amid a robust refining environment, we have seen IOCL reporting a GRM of USD 5.8/bbl in 9MFY16 vs USD 0.3/bbl in FY15 and USD 4.2/bbl in FY14. BPCL reported a GRM of USD 6.7/bbl in 9MFY16 vs USD 3.6/bbl in FY15 and USD 4.3/bbl in FY14 while HPCL reported a GRM of USD 6.4/bbl in 9MFY16 vs USD 2.8/bbl in FY15 and USD 3.4/bbl in FY14.
Exhibit 4: OMCs GRM trend
Source: Company, Elara Securities Research
However, GRM is expected to come off with global refinery net capacity addition set to outpace demand by ~0.45mnbopd. Also, tax breaks introduced in October 2015 on smaller vehicles in China are coming to an end in January 2017. In addition, China teapot refineries could potentially add ~82mn tonnes pa of petroleum products.
Despite a benign refining environment, we expect IOCL to show an improvement in GRM over FY15-18E due to successful commissioning and stabilization of 15.0-mn- tonne pa Paradip refinery with high complexity of 12.2.
Paradip coming of age
The primary concern on IOCL has been the successful commissioning of the 15mn tonne pa (INR 345bn) Paradip refinery. Our channel checks suggest the
0
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-15
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Sep
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-15
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v-15
Dec
-15
Jan
-16
Feb
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(INR/
lit)
Gross marketing margin Gasoil Avg gross margin on Gasoil Gross marketing margin Gasoline Avg gross margin on Gasoline
(10)
(5)
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10
1QFY
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2QFY
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3QFY
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4QFY
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Singapore GRM IOCL BPCL HPCL
Oil Marketing Companies
Oil
& G
as
27 Elara Securities (India) Private Limited
refinery has been progressing well and may surprise us with higher-than-estimated utilization.
Logistics in place
The Paradip refinery is just 5km away from the Paradip port. The port has three single point mooring (SPM) facilities. All are functioning well. Around 3.5mn tonne pa of products are expected to be evacuated through the rail & road network ex-Paradip & Bhubaneshwar marketing terminals. Sulfur and petcoke accounting for 1.85mn tonne pa of production are expected to be consumed by nearby industries. The North and South jetty are expected to take care of 6mn tonne pa of product evacuation. The company is also constructing a 2mn tonne pa Paradip-Raipur-Ranchi pipeline. However, the pipeline passes through Naxal areas. This has been creating problems in execution despite legal approvals. We assume a 70% utilization of the refinery in FY18E. This provides adequate time to complete the pipeline. Even if the pipeline is not completed, the two jetty and rail & road networks can handle additional load. For future requirements, the company is also constructing a 4mn tonne pa Paradip-Hyderabad pipeline.
Packages and their readiness
The refinery was originally scheduled to be commissioned by March 2012. However, delay due to clearances and process modifications resulted in test run of the mother units only in April 2015. Since then, there
has been increased focus on timely execution of the project. The mother units are running at a 65% utilization as on now. All intermediate units and a few secondary units are also running. The coker unit is running at ~50%. Only VGO & alkylation units remain to be commissioned by April 2016. Post that, synchronization of all units and gradual ramp-up would commence.
Exhibit 6: Status of the project
Crude, iintermediate and product tanks
Power plant & other uutilities
Primary units Secondary units
11 crude oil storage tanks with 60,000kl capacity each; already commissioned
Three gas turbines (naphtha/gasoil/gas); each of 105MW; two STGs of 30MW each
Test run done in Apr 2015; test run done at 12-13mn tonne pa; currently operating at ~65% utilization
Intermediate and most secondary units already commissioned; indigenously developed Indmax/FCCU commissioned in Dec 2015
Intermediate & most product tanks have already been commissioned
Two GTs operational, third standby; already shifted from gasoil to naphtha; both STGs operational; total power requirement of 180-190MW
Synchronized with intermediate units in Sep-Oct 2015
Commissioning of only two units remaining- Alkylation and VGO; to be completed by April 2016
Source: Company, Elara Securities Research
Exhibit 5: Product evacuation from Paradip
Source: Company, Elara Securities Research
ParadipBhubaneshwarLarge marketing terminal with facility for road/rail evacuation
Haldia
Budge Budge
Kalyani
Paradip-Haldia-Budge-Budge-Kalyani-Durgapur LPG pipeline
Sambalpur
Raipur
Ranchi
Sambalpur
Haldia
BudgBudg
Kalyan
hwarketing terminal with
� 3.5mmtpa through rail/road ex-Paradip/Bhubaneshwar marketing terminals
� 2mmtpa through Paradip-Raipur-Ranchi pipeline
� 1.85mmtpa of sulfur & petcoke in nearby areas
� 6mmtpa of through jetty
� 0.5mmtpa LPG through LPG pipeline
� Constructing 4mmtpa Paradip-Hyderabad product pipeline for future
Oil Marketing Companies
28 Elara Securities (India) Private Limited
Favorable yield, even better than RIL
Strong GRM in 2015 was led by light distillates. The Paradip refinery has an excellent product slate with ~25% of gasoline yield, even higher than ~17% for RIL.
Exhibit 7: Product yield
Product Yield (%) Remarks
Propylene 1.3 Will be fed to the upcoming PPU unit
LPG 3.9
Naphtha 0
Gasoline 25.3 Highest among India’s refineries
SKO/ATF 13.1
Gasoil 37.5
Sulfur 1.8
Petcoke 8.1
Fuel & loss 9.0
Source: Company, Elara Securities Research
Paradip to boost profit
In our base case, we assume a 30% utilization of the refinery in FY17E, followed by a gradual ramp-up to 70% in FY18E. Even at 30% utilization, we estimate the refinery will generate an EBITDA of INR 6.4bn in FY17. We estimate an EBITDA of INR 31bn in FY18 and an EBITDA of INR 45bn when the refinery runs at 100% utilization.
Exhibit 8: Economics of Paradip
FY17E FY18E FY19E
Throughput (mn tonne) 4.5 10.5 15.0 GRM (USD/bbl) 6.0 8.5 8.5
Opex (USD/bbl) 3.0 2.5 2.5
EBITDA (INR mn) 6,650 31,402 44,860
Depreciation (INR mn) 10,350 10,350 10,350
Interest cost (INR mn) 6,760 6,760 6,760
PBT (INR mn) (10,460) 14,292 27,750
Source: Elara Securities Estimate
IOCL refining to contribute 28% of EBITDA in FY18E
We estimate IOCL’s GRM will increase from USD 5.1/bbl in FY17 to USD 5.4/bbl in FY18, due to higher contribution of USD 8.5/bbl from the Paradip refinery. As a result, we expect refining EBITDA of INR 84bn in FY18E. On total EBITDA of INR 303bn, refining contributes 28%.
Exhibit 9: Refineries & their complexity
Capacity (mn tonne pa)) Complexity
Koyali 13.7 10.0
Panipat 15.0 10.5
Mathura 8.0 8.4
Barauni 6.0 7.8
Haldia 7.5 7.5
Bongaigaon 2.4 8.2
Guwahati 1.0 6.7
Digboi 0.7 11.0
Paradip 15.0 12.2
Source: Company, Elara Securities Estimate
Concerns on Paradip misplaced
The recent commissioning of the Brownfield MRPL expansion and Greenfield Bina & Bhatinda refineries were fraught with technical glitches and financial losses.
MRPL suffered due to technical problems with its captive power plant, which lingered for more than two years. This prevented commissioning of the secondary units, which requires lots of power and steam. As a result, GRM of the company suffered.
Exhibit 10: MRPL core GRM
Source: Company, Elara Securities Research
The other two refineries (Bina and Bhatinda) have been suffering due to high cost of debt. Bina has an outstanding debt of INR 130bn as on FY15-end and has paid INR 9.8bn (USD 3.4/bbl) as interest cost, resulting in a net loss of INR 8.0bn in FY15. We estimate its PBT breaks even at USD 7.2/bbl, excluding USD 4/bbl of coal & freight placement cost.
Similarly, the Bhatinda refinery has an outstanding debt of INR 22.5bn. Even after the recent debt restructuring, interest cost stands at USD 2.3/bbl, which takes PBT break-even to USD 6.3/bbl.
Against this, the Paradip refinery has been largely funded through internal accruals. Debt outstanding is at INR 169bn, which results in PBT breakeven of USD 4.8/bbl for the refinery.
Exhibit 11: Breakeven analysis (UUSD/bbl) Bina Bhatinda Paradip
Opex 2.5* 2.5 2.5 Depreciation 1.3 1.5 1.5
Interest cost 3.4 2.3 0.8
Total 7.2 6.3 4.8
*Excludes USD 4/bbl for coal & product placement cost
Source: Elara Securities Estimate
(2) 0 2 4 6 8
10 12 14
1QFY
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3QFY
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1QFY
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3QFY
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1QFY
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3QFY
11
1QFY
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3QFY
12
1QFY
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3QFY
13
1QFY
14
3QFY
14
1QFY
15
3QFY
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1QFY
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3QFY
16
(USD
/bb
l)
Core GRM Singapore GRM
Mother unit's expansion completed; secondary units delayed, resulting in poor GRM
Oil Marketing Companies
Oil
& G
as
29 Elara Securities (India) Private Limited
Exhibit 12: Refining EBITDA calculation of IOCL
FY15 FY16E FY17E FY18E
Throughput (mn tonne) 53.6 55.3 59.1 65.1
GRM (USD/bbl) 0.3 5.4 5.1 5.4
EBITDA (INR mn) (70,080) 63,922 59,387 84,573
Source: Company, Elara Securities Estimate
BPCL also to show GRM improvement
With commissioning of the Kochi IREP, we expect BPCL GRM to increase from USD 4.4/bbl in FY17E to USD 5.5/bbl in FY18E. On the other hand, HPCL is not having any yield improvement program during the period. As a result, we expect a decline in HPCL GRM from USD 5.9/bbl in FY16E to USD 4.4/bbl over FY17-18E.
Exhibit 13: Refining EBITDA for BPCL & HPCL
FY15 FY16E FY17E FY18E
BPCL
Throughput (mn tonne) 23.4 23.5 25.7 27.5
GRM (USD/bbl) 3.6 6.1 4.4 5.5
EBITDA (INR mn) 20,171 49,659 35,021 52,547
% of total EBITDA 24 50 39 47
HPCL
Throughput (mn tonne) 16.2 16.5 16.0 16.0
GRM (USD/bbl) 2.7 5.9 4.4 4.4
EBITDA (INR mn) 7,508 31,171 20,449 20,733
% of total EBITDA 13 45 29 28
Source: Company, Elara Securities Estimate
Under-recovery rears its ugly head in Q3FY16
It was earlier decided that the government would bear upto INR 12/lit of subsidy on kerosene and the rest
would be borne by the upstream companies. Under-recovery on kerosene stood at INR 15.1/lit in Q3FY16. However, since oil prices were low in Q3FY16, the government did not levy any subsidy burden on the upstream companies and restricted itself to bearing INR 12/lit. As a result, we have seen government levy a subsidy burden of INR 3bn on OMC. Although the quantum is small compared to ~INR 21-22bn of under-recoveries borne during FY14-15, it raises concerns of subsidy being levied on OMC again if crude price start inching up.
Exhibit 15: Net under-recoveries of OMC vs crude
Source: Companies, Elara Securities Research
E&P presence of IOCL
IOCL is present in 10 domestic blocks and seven overseas. However, most blocks are in the early stages of exploration, and we do not consider any for our valuation.
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60
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120
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10,000
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20,000
25,000
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FY13
FY14
FY15
9MFY
16
(USD
/bb
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(INR
mn
)
IOC BPCL HPCL Brent (RHS)
Exhibit 14: IOCL’s E&P presence
Pacific NorthWest LNG, Canada
Acquired in 2013 Potential Reserves:
52.77 Tcf 2P Reserves: 19 Tcf 1P Reserves: 4.5 Tcf
Initial IndianOil Investment:
USD 1bn
IndianOil Stake: Reserves 10% - 5.3 Tcf LNG Terminal Offtake: 1.2 MMTPA – exports
by 2020 Cumulative Revenue: USD 67.17mn as on
31.03.2015
Niobrara Shale Asset, US
Acquired in 2012
Indian Oil Share: 10% (19.4 MMboe) as
on 31.3.2015 Cumulative Production:
398,000 boe as on 31.03.2015
Cumulative Revenue: USD 20.18mn
Carabobo Project-1, Venezuela
Acquired in 2010
Indian Oil Share: 3.5% (106 MMboe)
Cumulative Production: 1,68,670 bbl as on
31.3.2015
Source: Company, Elara Securities Estimate
Oil Marketing Companies
30 Elara Securities (India) Private Limited
E&P becomes albatross for BPCL
BPCL once drew pride on account of its E&P portfolio, especially in Brazil and Mozambique. However, as far as Brazil’s assets are concerned, the priority for Petrobras, the operator, has shifted to improving corporate governance. Additionally, with low oil prices, the emphasis of Petrobras, one of the highest indebted companies globally, is likely to be on assets that can be monetized sooner than those in early stages of exploration. Hence, we do not expect any production to commence from BPCL’s E&P assets in Brazil in the near term.
Additionally, the huge 50-70+ tcf of recoverable resources in Mozambique block appear to have lost their attractiveness, due to LNG prices falling sharply to USD 4.5/mmBtu. The final investment decision for the project has not yet been achieved and production also does not seem possible by FY20.
Pipeline: steady source of income for OMC
Pipeline freights are linked to railway freight. However, actual operating cost is very low, which results in INR 500-700/tonne of EBITDA from the pipeline business for OMC. The segment adds 22% to EBITDA of IOCL and 5% of BPCL and 9% of HPCL.
Exhibit 16: Pipeline EBITDA calculation for IOCL
FY15 FY16E FY17E FY18E
Throughput (mn tonne) 75.7 79.9 82.0 82.0
EBITDA (INR/tonne) 724.6 724.3 760.0 798.0
EBITDA (INR mn) 54,840 57,886 62,296 65,410
Source: Company, Elara Securities Estimate
Exhibit 17: Pipeline EBITDA contribution in FY18E
Pipeline as % of total EBITDA (%)
IOCL 22
BPCL 5
HPCL 9
Source: Elara Securities Estimate
Petrochem to add 16% of EBITDA in FY18E for IOCL
Petchemicals delta for IOCL has improved from USD 224/tonne in FY15 to USD 370/tonne in 9MFY16. We expect delta to be USD 290/tonne during FY17-18E, with an EBITDA CAGR of 13% over FY15-18E. We estimate petrochemicals to contribute 15% towards EBITDA for IOCL in FY18E.
Exhibit 18: Petchem EBITDA for IOCL
FY15 FY16E FY17E FY18E
Sales (mn tonne) 2.5 2.4 2.5 2.5
EBITDA (USD/tonne) 224 347 290 290
EBITDA (INR mn) 34,200 54,068 48,720 49,300
Source: Company, Elara Securities Estimate
Valuation: IOCL is the preferred pick
We value IOCL at 5.5x FY18E EBITDA. We then knock off net debt to arrive at a revised target price of INR 599 from INR 607. We reiterate our BBuy recommendation on the stock. We have assumed a conservative 30% and 70% utilization of the Paradip refinery in FY17E and FY18E, respectively. The current project status points towards much brighter prospects, and we may be surprised with higher-than-estimated utilization.
HPCL and BPCL have higher leverage to marketing. This makes them more vulnerable to marketing margin as well as any possible net under-recoveries. As a result, we decrease EV/EBITDA for HPCL and BPCL from 6.0x to 5.5x each. The prospects of BPCL’s E&P portfolio also are reduced in the current oil and LNG environment. With a revised target price of INR 909 from INR 1,006, we downgrade BPCL to RReduce from Buy. With a new target price of INR 875 from INR 1,016, we downgrade HPCL to Reduce from Buy.
Exhibit 19: Valuation of OMCs
IOCL BPCL HPCL
FY18E EBITDA (INR mn) 303,366 111,616 74,102
Target EV/EBITDA (x) 5.5 5.5 5.5
Target EV (INR mn) 1,668,513 613,889 407,563
Net debt excluding oil bonds (INR mn) 413,226 125,835 163,813
Valuation of core business (INR) 517 675 720
Value of investments (INR) 82 234 155
Total valuation (INR) 599 909 875
CMP (INR) 422 948 857
Upside (%) 42 (4) 2
Note: pricing as on 13 April 2016; Source: Elara Securities Estimate
Exhibit 20: Major assumptions for IOCL
FY15 FY16E FY17E FY18E
Throughput (mn tonne) 53.6 55.3 59.1 65.1
GRM (USD/bbl) 0.3 5.4 5.1 5.4
Net under-recoveries (INR bn) 12 0 0 0
Source: Company, Elara Securities Estimate
Exhibit 21: Major assumptions for BPCL
FY15 FY16E FY17E FY18E
Throughput (mn tonne) 23.4 23.5 25.7 27.5
GRM (USD/bbl) 3.6 6.2 4.4 5.5
Net under-recoveries (INR bn) 4.9 0 0 0
Source: Company, Elara Securities Estimate
Exhibit 22: Major assumptions for HPCL
FY15 FY16E FY17E FY18E
Throughput (mn tonne) 16.2 16.5 16.0 16.0
GRM (USD/bbl) 2.8 5.9 4.4 4.4
Net under-recoveries (INR bn) 5.0 0 0 0
Source: Company, Elara Securities Estimate
Oil Marketing Companies
Oil
& G
as
31 Elara Securities (India) Private Limited
Standalone Financials (YE March) - BPCL Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income 2,335,627 1,729,311 1,577,914 1,925,477
EBITDA 83,038 100,928 89,727 111,616
Depreciation 25,160 22,042 25,667 29,292
Forex loss (2,243) 3,846 0 0
EBIT 60,121 75,040 64,060 82,324
Interest cost 5,831 6,005 7,329 8,130
Other income 19,865 17,244 21,252 22,182
PBT 74,155 86,278 77,982 96,376
Less: taxation 23,310 27,623 25,991 32,122
Effective tax rate (%) 31.4 32.0 33.3 33.3
PAT 50,845 58,654 51,991 64,254
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity capital 7,231 7,231 7,231 7,231
Reserves 217,444 253,453 285,371 324,817
Total borrowings 117,773 158,000 190,000 200,000
Deferred taxes 17,083 17,083 17,083 17,083
Total liabilities 359,530 435,766 499,684 549,131
Fixed assets 279,807 357,765 432,098 482,805
Investments 123,911 123,911 123,911 123,911
Inventories 144,579 102,610 93,776 114,298
Debtors 26,077 19,307 17,617 21,497
Cash 13,602 43,937 24,077 43,656
Loans & advances 48,256 34,659 31,514 38,461
Other current assets 61,057 22,215 22,215 22,215 Net current assets (44,189) (45,910) (56,325) (57,586) Total assets 359,530 435,766 499,684 549,131 Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating cash flow 203,834 112,753 68,213 114,386
Capex (83,922) (100,000) (100,000) (100,000)
Free cash flow to firm 119,913 12,753 (31,787) 14,386
Investing cash flow (89,364) (100,000) (100,000) (80,000)
Financing cash flow (102,906) 17,582 11,927 (14,807)
Net change in cash 11,564 30,335 (19,860) 19,578
Opening cash 2,038 13,602 43,937 24,077
Closing cash 13,602 43,937 24,077 43,656
Ratio Analysis FY15 FY16E FY17E FY18E
Income Statement Ratios (%)
Revenue growth (10.9) (26.0) (8.8) 22.0
EBITDA growth (5.3) 21.5 (11.1) 24.4
PAT growth 25.2 15.4 (11.4) 23.6
EBITDAM 3.6 5.8 5.7 5.8
Net margin 2.2 3.4 3.3 3.3
Return & Liquidity Ratios
Interest/PBIT (x) 0.1 0.1 0.0 0.0
Net debt/Equity (x) 0.5 0.4 0.6 0.5
ROE (%) 24.3 24.2 18.8 20.6
ROCE (%) 11.2 13.4 9.5 10.8
Per Share Data & Valuation Ratios
EPS (INR) 70.3 81.1 71.9 88.9
EPS growth (%) 25.2 15.4 (11.4) 23.6
BVPS (INR) 310.7 360.5 404.7 459.2
DPS (INR) 23.2 26.8 23.7 29.3
P/E (x) 13.2 11.4 12.9 10.4
EV/EBITDA (x) 9.4 7.8 8.7 7.0
Price/Book (x) 3.0 2.6 2.3 2.0
Dividend yield (%) 2.5 2.9 2.6 3.2
Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
Revenue & margin growth trend
Source: Company, Elara Securities Estimate
Adjusted profit growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
3.6
5.8 5.7 5.8
2
3
4
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6
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500,000
1,000,000
1,500,000
2,000,000
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FY15 FY16E FY17E FY18E
(%)
(INR
mn
)
Net operating income (LHS) EBITDAM (RHS)
25.2
15.4
(11.4)
23.6
(15)
0
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30
45
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20,000
40,000
60,000
80,000
FY15 FY16E FY17E FY18E
(%) (IN
R m
n)
PAT (LHS) YoY (RHS)
11.2 13.4
9.5 10.8
24.3 24.2
18.8 20.6
0
5
10
15
20
25
30
FY15 FY16E FY17E FY18E
ROCE (%) ROE (%)
Oil Marketing Companies
32 Elara Securities (India) Private Limited
Standalone Financials (YE March) - HPCL Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income 2,066,262 1,640,748 1,463,007 1,704,158
EBITDA 56,635 71,882 71,450 74,102
Depreciation 19,712 25,087 27,087 29,087
EBIT 36,923 46,794 44,363 45,015
Interest cost 7,066 5,783 6,750 7,050
Other income 11,684 10,522 9,862 10,230
PBT 41,541 51,532 47,475 48,195
Less: taxation 14,209 17,649 15,823 16,063
Effective tax rate (%) 34.2 34.2 33.3 33.3
PAT 27,333 33,883 31,651 32,132
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity capital 3,390 3,390 3,390 3,390
Reserves 156,831 178,028 197,830 217,932
Total borrowings 170,556 215,000 235,000 235,000
Deferred taxes 41,036 41,036 41,036 41,036
Total liabilities 371,813 437,455 477,256 497,358
Fixed assets 325,372 340,285 363,197 384,110
Investments 112,415 112,415 112,415 112,415
Inventories 129,723 98,860 95,312 107,182
Debtors 36,031 22,476 22,045 28,014
Cash 171 23,443 19,946 25,283
Loans & advances 67,364 65,522 58,401 68,035
Other current assets 4,432 3,593 3,952 4,347
Net current assets (65,974) (15,245) 1,644 834 Total assets 371,813 437,455 477,256 497,358 Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E Operating cash flow 209,723 31,514 38,352 67,366
Capex (40,106) (40,000) (50,000) (50,000)
Free cash flow to firm 169,617 (8,486) (11,648) 17,366
Investing cash flow (43,922) (40,000) (50,000) (50,000)
Financing cash flow (165,977) 31,758 8,150 (12,030)
Net change in cash (176) 23,273 (3,497) 5,336
Opening cash 347 171 23,443 19,946
Closing cash 171 23,443 19,946 25,283
Ratio Analysis FY15 FY16E FY17E FY18E
Income Statement Ratios (%)
Revenue growth (7.5) (20.6) (10.8) 16.5
EBITDA growth 5.2 26.9 (0.6) 3.7
PAT growth 57.6 24.0 (6.6) 1.5
EBITDAM 2.7 4.4 4.9 4.3
Net margin 1.3 2.1 2.2 1.9
Return & LLiquidity Ratios
Interest/PBIT (x) 0.2 0.1 0.2 0.2
Net debt/Equity (x) 1.1 1.1 1.1 0.9
ROE (%) 17.6 19.8 16.5 15.2
ROCE (%) 6.1 8.5 7.1 6.7
Per Share Data & Valuation Ratios
EPS (INR) 80.7 100.1 93.5 94.9
EPS growth (%) 57.6 24.0 (6.6) 1.5
Book Value (INR) 473.2 535.8 594.2 653.6
DPS (INR) 24.5 32.0 29.9 30.4
P/E (x) 10.6 8.6 9.2 9.0
EV/EBITDA (x) 8.5 6.7 6.7 6.5
Price/Book (x) 1.8 1.6 1.4 1.3
Dividend yield (%) 2.9 3.7 3.5 3.5
Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
Revenue & margin growth trend
Source: Company, Elara Securities Estimate
Adjusted profit growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
2.7
4.4 4.9
4.3
0
2
4
6
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
FY15 FY16 FY17E FY18E
(%)
(INR
mn
)
Net operating income (LHS) EBITDA (RHS)
57.6
24.0
(6.6) 1.5
(20)
0
20
40
60
80
(10,000)
0
10,000
20,000
30,000
40,000
FY15 FY16 FY17E FY18E
(%)
(INR
mn
) Adj PAT (LHS) Adj PAT growth (RHS)
6.1 8.5
7.1 6.7
17.6 19.8
16.5 15.2
0
5
10
15
20
25
FY15 FY16E FY17E FY18E
(%)
ROCE ROE
Oil Marketing Companies
Oil
& G
as
33 Elara Securities (India) Private Limited
Standalone Financials (YE March) - IOCL Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income 4,375,261 3,267,994 3,032,039 3,568,822
EBITDA 107,921 240,290 268,350 303,366
Depreciation 45,287 48,966 56,491 59,291
Forex loss (1,004) 11,210 0 0
EBIT 63,638 180,114 211,858 244,075
Interest cost 34,353 23,823 23,780 23,500
Other income 33,986 19,763 17,215 17,301
PBT 63,271 176,054 205,293 237,876
Exceptional item 16,681 13,718 0 0
Tax 27,223 51,779 68,424 79,284
Effectiva tax rate (%) 34.0 27.3 33.3 33.3
PAT 52,729 137,992 136,869 158,592
Adj PAT 36,049 124,275 136,869 158,592
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity capital 24,280 24,280 24,280 24,280
Reserves 655,420 744,979 833,809 936,738
Total borrowings 497,106 614,000 575,000 600,000
Deferred taxes 67,202 67,202 67,202 67,202
Total liabilities 1,244,008 1,450,461 1,500,291 1,628,219
Fixed assets 1,025,750 1,136,784 1,240,293 1,341,002
Investments 238,995 238,995 238,995 238,995
Inventories 455,439 398,164 363,444 429,430
Debtors 67,582 53,720 49,842 58,666
Cash 1,119 56,219 41,953 33,853 Other current assets 48,891 48,891 48,891 48,891 Loans & advances 360,720 325,650 301,920 355,500 Net current assets (20,737) 74,682 21,003 48,223
Total assets 1,244,008 1,450,461 1,500,291 1,628,219
Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating cash flow 422,679 146,639 232,772 182,563
Capex (102,756) (160,000) (160,000) (160,000)
Free cash flow to firm 319,923 (13,361) 72,772 22,563
Investing cash flow (105,809) (160,000) (160,000) (160,000)
Financing cash flow (341,836) 68,461 (87,039) (30,663)
Net change in cash (24,967) 55,100 (14,267) (8,100)
Opening cash 26,085 1,119 56,219 41,953
Closing cash 1,119 56,219 41,953 33,853
Ratio Analysis FY15 FY16E FY17E FY18E
Income statement ratios (%)
Revenue growth (7.5) (25.3) (7.2) 17.7
EBITDA growth (42.6) 122.7 11.7 13.0
Adj PAT growth (31.6) 244.7 10.1 15.9
EBITDA margin 2.5 7.4 8.9 8.5
Adj net margin 0.8 3.8 4.5 4.4
Return & Liquidity Ratios
Interest/PBIT (x) 0.5 0.1 0.1 0.1
Net debt/Equity (x) 0.7 0.7 0.6 0.6
ROE (%) 7.8 17.9 16.0 16.5
ROCE (%) 3.2 10.2 10.0 10.9
Per Share Data & Valuation Ratios
Adj EPS (INR) 14.8 51.2 56.4 65.3
Adj EPS growth (%) (31.6) 244.7 10.1 15.9
Book Value (INR) 280.0 316.8 353.4 395.8
DPS (INR) 6.6 17.1 16.9 19.6
P/E (x) 28.4 8.2 7.5 6.5
EV/EBITDA (x) 14.7 6.6 5.9 5.2
Price/Book (x) 1.5 1.3 1.2 1.1
Dividend yield (%) 1.6 4.0 4.0 4.6
Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
Revenue & margin growth trend
Source: Company, Elara Securities Estimate
Adjusted profit growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
2.5
7.4
8.9 8.5
0
2
4
6
8
10
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
FY15 FY16E FY17E FY18E
(%)
(INR
mn
)
Net sales (LHS) EBITDAM (RHS)
(31.6)
244.7
10.1 15.9
(50)
0
50
100
150
200
250
300
(50,000)
0
50,000
100,000
150,000
200,000
FY15 FY16E FY17E FY18E
(%)
(INR
mn
)
Adj PAT (LHS) Adj EPS growth (RHS)
7.8
17.9 16.0 16.5
3.2
10.2 10.0 10.9
0
5
10
15
20
FY15 FY16E FY17E FY18E
(%)
ROE ROCE
Oil Marketing Companies
34 Elara Securities (India) Private Limited
Coverage History - BPCL
Date Rating Target Price Closing Price
1
24-Jan-2014 Buy INR 529 INR 343
2
13-Feb-2014 Buy INR 510 INR 355
3
16-May-2014 Accumulate INR 583 INR 552
4
30-May-2014 Accumulate INR 569 INR 521
5
23-June-2014 Buy INR 705 INR 553
6
25-June-2014 Reduce INR 597 INR 581
7
12-Aug-2014 Reduce INR 583 INR 591
8
27-Aug-2014 Sell INR 637 INR 681
9
12-Nov-2014 Reduce INR 726 INR 765
10
14-Jan-2015 Accumulate INR 685 INR 652
11
16-Feb-2015 Sell INR 650 INR 725
12
7-Mar-2015 Sell INR 709 INR 776
13
8-Apr-2015 Sell INR 650 INR 820
14
29-May-2015 Sell INR 781 INR 850
15
14-Aug-2015 Accumulate INR 947 INR 874
16
12-Feb-2016 Buy INR 1,006 INR 773
17
13-Apr-2016 Reduce INR 909 INR 926
1 2
3 4
5
6 7
8
9
10
11 12
13 14
15
16
17
200
300
400
500
600
700
800
900
1,000
1,100 Ja
n-1
2
Mar
-12
May
-12
Jul-1
2
Sep
-12
No
v-12
Jan
-13
Mar
-13
May
-13
Jul-1
3
Sep
-13
No
v-13
Jan
-14
Mar
-14
May
-14
Jul-1
4
Sep
-14
No
v-14
Jan
-15
Mar
-15
May
-15
Jul-1
5
Sep
-15
No
v-15
Jan
-16
Mar
-16
Not Covered Covered
Oil Marketing Companies
Oil
& G
as
35 Elara Securities (India) Private Limited
Coverage History - HPCL
Date Rating Target Price Closing Price
1
24-Jan-2014 Buy INR 310 INR 232
2
16-May-2014 Sell INR 310 INR 404
3
28-May-2014 Sell INR 352 INR 408
4
23-June-2014 Buy INR 593 INR 388
5
25-June-2014 Reduce INR 425 INR 416
6
12-Aug-2014 Reduce INR 391 INR 409
7
27-Aug-2014 Sell INR 366 INR 458
8
13-Nov-2014 Sell INR 487 INR 542
9
14-Jan-2015 Sell INR 534 INR 573
10
13-Feb-2015 Sell INR 578 INR 626
11
28-May-2015 Reduce INR 654 INR 636
12
11-Aug-2015 Accumulate INR 1,004 INR 954
13
09-Nov-2015 Accumulate INR 943 INR 795
14
12-Feb-2016 Buy INR 1,016 INR 690
15
13-Apr-2016 Reduce INR 875 INR 850
1
2 3
4
5
6
7
8 9 10 11
12
13
14
15
100
200
300
400
500
600
700
800
900
1,000
1,100
Jan
-12
Mar
-12
May
-12
Jul-1
2
Sep
-12
No
v-12
Jan
-13
Mar
-13
May
-13
Jul-1
3
Sep
-13
No
v-13
Jan
-14
Mar
-14
May
-14
Jul-1
4
Sep
-14
No
v-14
Jan
-15
Mar
-15
May
-15
Jul-1
5
Sep
-15
No
v-15
Jan
-16
Mar
-16
Not Covered Covered
Oil Marketing Companies
36 Elara Securities (India) Private Limited
Coverage History – IOCL
Date Rating Target Price Closing Price
1
24-Jan-2014 Sell INR 182 INR 228
2
29-May-2014 Sell INR 193 INR 353
3
20-June-2014 Sell INR 197 INR 322
4
12-Aug-2014 Sell INR 200 INR 341
5
27-Aug-2014 Sell INR 268 INR 356
6
13-Nov-2014 Sell INR 227 INR 346
7
14-Jan-2015 Sell INR 260 INR 336
8
13-Feb-2015 Sell INR 280 INR 310
9
29-May-2015 Sell INR 321 INR 356
10
13-Aug-2015 Reduce INR 401 INR 395
11
21-Aug-2015 Accumulate INR 467 INR 396
12
3-Nov-2015 Buy INR 536 INR 401
13
8-Jan-2016 Buy INR 562 INR 446
14
12-Feb-2016 Buy INR 607 INR 365
15
13-Apr-2016 Buy INR 599 INR 416
Guide to Research Rating BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
1
2
3 4
5 6
7
8
9
10
11 12
13
14
15
150
200
250
300
350
400
450
500 Ja
n-1
2
Mar
-12
May
-12
Jul-1
2
Sep
-12
No
v-12
Jan
-13
Mar
-13
May
-13
Jul-1
3
Sep
-13
No
v-13
Jan
-14
Mar
-14
May
-14
Jul-1
4
Sep
-14
No
v-14
Jan
-15
Mar
-15
May
-15
Jul-1
5
Sep
-15
No
v-15
Jan
-16
Mar
-16
Not Covered Covered
Glo
bal
Mar
kets
Res
earc
h
Elara Securities (India) Private Limited
Swarnendu Bhushan • [email protected] • +91 22 6164 8504 Durgesh Poyekar • [email protected] • +91 22 6164 8541
GRM softening to hit CPCL the hardest GRM to decline further
Singapore GRM has averaged USD 7.5/bbl in FY16 vs USD 5.6/bbl and USD 6.4/bbl in FY14 and FY15, respectively. GRM has corrected from a high of USD 10/bbl in January 2016 to the current levels of ~USD 5/bbl. We expect it to remain subdued, given 1) refinery net capacity addition would outpace demand growth, 2) China teapot refineries will start to operate at higher utilization levels, and 3) the Middle East refineries stabilize. Fuel & loss for Chennai Petroleum (CPCL IN) stands at 9.0-9.5% vs 6.0-6.5% for other refineries in India. It is highly unlikely crude will remain at the current low levels, resulting in higher fuel & loss and lower GRM for CPCL. For 9MFY16, the company has clocked in a GRM of USD 5.4/bbl, which is unlikely to sustain structurally.
Residue upgradation project to increase distillate yield
The company is in a capex phase with residue upgradation project (INR 31.1bn) and replacement of existing crude oil pipeline (INR 2.6bn). The residue upgradation project is expected to turn around the company, says management, with improvement in distillate yield by 6-8%. However, the benefits from these projects are expected to materialize only in FY18.
Infusion of capital by Indian Oil Corporation
Due to erosion of net worth, the parent IOCL had infused INR 10bn during Q2FY16 through the issue of non-convertible cumulative redeemable preference shares, which will help CPCL pursue its capex.
Valuation: revise rating to Sell with a TP of INR 154
Although IOCL has infused funds into the company, which will help it tide over difficult times, we expect it to underperform on the operational front in a falling GRM environment. Also, the benefits from the capex phase are likely to accrue only from FY18. We revise our rating to SSell from Reduce, due to the recent uptick in the stock price. We marginally revise our TP to INR 154 from INR 149 based on 5.5x FY18E EBITDA of INR 13bn. We also note the TP is highly sensitive to GRM and a USD 0.5/bbl change in GRM could lead to INR 96 change in TP.
India | Oil & Gas 21 April 2016
Thematic Report/Target price/Rating change
Chennai Petroleum
Rating: Sell Target Price: INR 154 Downside: 26% CMP: INR 202 (as on 13 April 2016)
Key data*
Bloomberg /Reuters Code MRL IN/CHPC.BO
Current /Dil. Shares O/S (mn) 149/149
Mkt Cap (INR bn/USD mn) 30/452
Daily Vol. (3M NSE Avg.) 523,139
Face Value (INR) 10
1 USD = INR 66.6
Note: *as on 13 April 2016; Source: Bloomberg
Price & volume
Source: Bloomberg
Shareholding (%) Q4FY15 Q1FY16 Q2FY16 Q3FY16
Promoter 67.3 67.3 67.3 67.3
Institutional Investors 17.3 21.0 19.0 19.0
Other Investors 3.9 3.1 3.8 3.8
General Public 11.6 8.6 9.9 10.0
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 3.1 (4.5) (11.8)
Chennai Petroleum 3.1 (12.0) 162.6
MRPL 0.3 20.0 (8.4)
Source: Bloomberg
Key Financials YE March
Reevenue ((INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA margin (%)
Adj PAT (INR mn)
YoY (%)
EPS (INR)
RoE (%)
RoCE (%)
P/E (x)
EV/EBITDA (x)
FY15 418,660 (15.2) (27) NA (390) NA (2.6) (2.3) NA NA NA
FY16E 252,432 (39.7) 12,581 NA 5,487 NA 36.8 29.4 12.6 5.5 6.0
FY17E 207,006 (18.0) 9,925 (21.1) 2,763 (49.6) 18.6 12.7 6.7 11.0 7.6
FY18E 214,091 3.4 13,043 31.4 3,952 43.0 26.5 16.2 7.8 7.7 5.8
Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
0
5
10
15
20
25
30
0
50
100
150
200
250
300
Apr-15 Aug-15 Dec-15 Apr-16
Vol. in mn (RHS) Chennai Petroleum (LHS)
Chennai Petroleum
38 Elara Securities (India) Private Limited
Financials (YE March) Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income 418,660 252,432 207,006 214,091
EBITDA (27) 12,581 9,925 13,043
Depreciation 2,261 2,482 2,512 3,517
Forex loss 1,466 1,500 0 0
EBIT (3,754) 8,598 7,413 9,525
Interest cost 4,037 3,290 3,675 4,025
Other income 367 385 405 425
PBT (7,424) 5,694 4,142 5,925
Less: taxation (7,034) 207 1,379 1,973
Effective tax rate (%) NA 3.6 33.3 33.3
PAT (390) 5,487 2,763 3,952
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity Capital 1,490 1,490 1,490 1,490
Reserves 15,061 19,264 21,381 24,408
Total Borrowings 43,991 50,000 55,000 60,000
Deferred Taxes 0 0 0 0
Total Liabilities 60,541 70,754 77,871 85,898
Fixed Assets 48,592 56,110 65,597 74,080
Investments 254 200 200 200
Inventories 38,051 21,685 16,198 16,525
Debtors 18,281 12,449 10,209 10,558
Cash 399 5,151 6,256 5,491
Loans & Advances 3,957 2,445 2,008 2,077
Other Current Assets 11 0 0 0
Net Current Assets 11,695 14,444 12,073 11,618
Total Assets 60,541 70,754 77,871 85,898
Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating Cash Flow 15,254 9,972 8,752 7,160
Capex (4,494) (10,000) (12,000) (12,000)
Free cash flow to firm 10,760 (28) (3,248) (4,840)
Investing cash flow (4,500) (9,946) (12,000) (12,000)
Financing cash flow (10,815) 4,725 4,353 4,075
Net change in cash (61) 4,752 1,105 (765)
Opening cash 460 399 5,151 6,256
Closing cash 399 5,151 6,256 5,491
Ratio Analysis FY15 FY16E FY17E FY18E
Income Statement Ratios (%)
Revenue growth (15.2) (39.7) (18.0) 3.4
EBITDA growth NA NA (21.1) 31.4
PAT growth NA NA (49.6) 43.0
EBITDAM (0.0) 5.0 4.8 6.1
PAT margin (0.1) 2.2 1.3 1.8
Return & liquidity ratios
Interest/PBIT (x) (1.1) 0.4 0.5 0.4
Net debt/Equity (x) 2.6 2.2 2.1 2.1
ROE (%) (2.3) 29.4 12.7 16.2
ROCE (%) NA 12.6 6.7 7.8
Per share data & valuation ratios
EPS (INR) (2.6) 36.8 18.6 26.5
EPS growth (%) NA NA (49.6) 43.0
Book Value (INR/share) 111.1 139.4 153.6 173.9
DPS (INR) 0.0 7.4 3.7 5.3
P/E (x) NA 5.5 11.0 7.7
EV/EBITDA (x) NA 6.0 7.6 5.8
Price/Book (x) 1.8 1.5 1.3 1.2
Dividend Yield (%) 0.0 3.6 1.8 2.6
Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
Revenue & margin growth trend
Source: Company, Elara Securities Estimate
Adjusted profit trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
(0.0)
5.0 4.8
6.1
(1.0)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
(100,000)
0
100,000
200,000
300,000
400,000
500,000
600,000
FY15 FY16E FY17E FY18E
(%) (IN
R m
n)
Net sales (LHS) EBITDA margin (RHS)
(2,000)
0
2,000
4,000
6,000
FY15 FY16E FY17E FY18E
(IN
R m
n)
Adj PAT
0.0 12.6 6.7 7.8
(2.3)
29.4
12.7 16.2
(10)
0
10
20
30
40
FY15 FY16E FY17E FY18E
(%)
ROCE (%) ROE (%)
Chennai Petroleum
Oil
& G
as
39 Elara Securities (India) Private Limited
Exhibit 1: Valuation
FY18E EBITDA (INR mn) 13,043 Target EV/EBITDA (x) 5.5 Target EV (INR mn) 71,734 FY17E net debt (INR mn) 48,744 Target market cap (INR mn) 22,991 Target price (INR) 154 Source: Elara Securities Estimate
Exhibit 2: Major assumptions
FY15 FY16E FY17E FY18E
Throughput (mn tonne) 10.8 9.6 11.2 11.2
GRM (USD/bbl) 2.0 5.0 4.0 4.8
Source: Company, Elara Securities Research
Chennai Petroleum
40 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
07-Feb-2014 Accumulate INR 72 INR 63
2
23-May-2014 Reduce INR 107 INR 108
3
7-Aug-2014 Reduce INR 83 INR 87
4
27-Aug-2014 Sell INR 80 INR 91
5
03-Nov-2014 Sell INR 88 INR 103
6
12-Feb-2015 Reduce INR 75 INR 75
7
22-May-2015 Accumulate INR 100 INR 91
8
10-Aug-2015 Sell INR 130 INR 205
9
4-Nov-2015 Sell INR 173 INR 215
10
11-Feb-2016 Reduce INR 149 INR 145
11
13-Apr-2016 Sell INR 154 INR 202
Guide to Research Rating BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
1
2
3 4 5
6 7
8 9
10
11
40
90
140
190
240
290 Ja
n-1
2
Mar
-12
May
-12
Jul-1
2
Sep
-12
No
v-12
Jan
-13
Mar
-13
May
-13
Jul-1
3
Sep
-13
No
v-13
Jan
-14
Mar
-14
May
-14
Jul-1
4
Sep
-14
No
v-14
Jan
-15
Mar
-15
May
-15
Jul-1
5
Sep
-15
No
v-15
Jan
-16
Mar
-16
Not Covered Covered
Glo
bal
Mar
kets
Res
earc
h
Elara Securities (India) Private Limited
Swarnendu Bhushan • [email protected] • +91 22 6164 8504 Durgesh Poyekar • [email protected] • +91 22 6164 8541
Core performance improving Improvement in core GRM
Our interaction with Mangalore Refinery (MRPL IN) management reveals the company has stabilized operations of its refinery post the phase III expansion. There has been a steady improvement in core GRM, which further underscores guidance. The company has reported a core GRM of USD 8.4/bbl in Q3FY16 vs USD 5.3/bbl in Q2FY16 and USD 6.7/bbl in Q2FY15. Even in a benign environment, we expect USD 6-6.5/bbl of GRM for the company.
Full utilization of PPU achieved
The polypropylene unit (PPU) was commissioned in June 2015. However, utilization was only gradually ramped up to 100% by FY16-end. This would end complete stabilization of INR 150bn expansion.
Scope for improvement in crude cost
The delayed coker unit (DCU) uses cheaper crude oil while maintaining a good product yield. To date, we have yet to see any major reduction in API of the crude basket. As the company achieves the same, it should see improvement in GRM. While Indian Strategic Petroleum Reserve (ISPRL) is expected to be commissioned in FY17, anchoring and unloading of very large crude carriers (VLCC) would lower freight and allow sourcing of a larger basket of crude, thereby giving a further boost to refining margin.
OMPL to stabilize in FY17
ONGC Mangalore Petrochemical (OMPL) has been running at ~75% utilization, due to unavailability of aromatic rich naphtha feedstock as per requirements. MRPL is in the process of changing its crude basket to produce aromatic rich naphtha, which will help OMPL to stabilize fully by FY17 and contribute meaningfully towards the merged entity, MRPL-OMPL.
Valuation: reiterate Buy with a TP of INR 90
Since the stabilization phase is complete, there shouldn’t be any major hiccups in its operations. Also, PPU running at full utilization will give a boost to GRM. We estimate an EBITDA (excluding OMPL) of INR 40.2bn in FY18, implying an EBITDA CAGR of 41% over FY14-18E. We arrive at a valuation of INR 82 for the standalone company on 5.5x FY18E EBITDA of INR 40.2. We value OMPL at INR 8 on 6.0x FY18E EBITDA. We reiterate BBuy with a TP of INR 90.
India | Oil & Gas 21 April 2016
Thematic Report
Mangalore Refinery
Rating: Buy Target Price: INR 90 Upside: 34% CMP: INR 67 (as on 13 April 2016)
Key data*
Bloomberg /Reuters Code MRPL IN/MRPL.BO
Current /Dil. Shares O/S (mn) 1,753/1,753
Mkt Cap (INR bn/USD mn) 118/1,765
Daily Vol. (3M NSE Avg.) 558,547
Face Value (INR) 10
1 USD = INR 66.6
Note: *as on 13 April 2016; Source: Bloomberg
Price & volume
Source: Bloomberg
Share holding (%) Q1FY16 Q2FY16 Q3FY16 Q4FY16
Promoter 88.6 88.6 88.6 88.6
Institutional Investors 4.5 3.8 4.1 4.1
Other Investors 1.2 1.5 1.3 1.4
General Public 5.8 6.2 6.0 5.9
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 3.1 (4.5) (11.8)
MRPL 0.3 20.0 (8.4)
Chennai Petroleum 3.1 (12.0) 162.6
Essar Oil 1.5 35.3 134.8
Source: Bloomberg
Key Financials YE March
Revenue ((INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA margin (%)
Adj PAT (INR mn)
YoY (%)
Adj. EPS (INR)
RoE (%)
RoCE (%)
P/E (x)
EV/EBITDA (x)
FY15 574,771 (20.0) (12,223) (2.1) (17,123) NA (8.9) (28.2) (13.2) NA (15.4)
FY16E 370,803 (35.5) 27,989 7.5 5,268 NA 2.7 12.7 4.5 24.9 6.7
FY17E 412,262 11.2 40,799 9.9 20,959 297.9 10.9 32.2 17.2 6.3 4.6
FY18E 488,201 18.4 40,245 8.2 20,973 0.1 10.9 25.8 17.0 6.3 4.7
Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
0
2
4
6
8
10
12
14
16
30
40
50
60
70
80
90
Apr-15 Aug-15 Dec-15 Apr-16
Vol. in mn (RHS) MRPL (LHS)
Mangalore Refinery
42 Elara Securities (India) Private Limited
Financials (YE March) Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income 574,771 370,803 412,262 488,201
EBITDA (12,223) 27,989 40,799 40,245
Depreciation 4,986 8,577 8,777 8,977
Net forex loss 6,835 11,760 0 0
EBIT (24,044) 7,652 32,022 31,269
Interest cost 4,071 4,926 3,225 2,325 Other income 6,221 7,503 1,345 1,219
PBT (21,893) 10,228 30,142 30,162
Prior period adj/Exceptional item (334) 1,753 0 0
Less: Taxation (4,437) 3,207 9,183 9,189
Effective tax rate (%) 20.0 26.8 30.5 30.5
Adj PAT (17,123) 5,268 20,959 20,973 Exceptional item 0 0 0 0
PAT (17,457) 7,021 20,959 20,973
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity capital 17,527 17,527 17,527 17,527
Reserves 35,523 39,558 55,613 71,679
Total borrowings 78,755 62,000 67,000 26,000
Deferred taxes 0 0 0 0
Total liabilities 131,805 119,085 140,140 115,205 Fixed assets 154,868 151,291 147,514 143,538
Investments 13,497 13,497 13,497 13,497
Inventories 33,996 22,357 37,891 35,745
Debtors 23,588 17,048 27,002 26,499
Cash 102,687 4,760 1,866 1,609
Loans & advances 10,483 5,996 6,002 6,913 Other current assets 4,238 0 0 0
Net current assets (36,559) (45,703) (20,871) (41,829)
Total assets 131,805 119,085 140,140 115,205
Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating cash flow 34,032 (74,939) 2,010 50,651
Capex (14,424) (5,000) (5,000) (5,000)
Free cash flow to firm 19,608 (79,939) (2,990) 45,651
Investing cash flow (27,771) (5,000) (5,000) (5,000) Financing cash flow (10,297) (17,988) 96 (45,908)
Net change in cash (4,036) (97,927) (2,894) (257)
Closing cash 102,687 4,760 1,866 1,609
Ratio Analysis FY15 FY16E FY17E FY18E
Income Statement Ratios (%)
Revenue growth (20.0) (35.5) 11.2 18.4
EBITDA growth (220.0) (329.0) 45.8 (1.4)
Adj PAT growth NA NA 297.9 0.1 EBITDAM (2.1) 7.5 9.9 8.2
Adj net margin (3.0) 1.4 5.1 4.3
Return & Liquidity Ratios
Interest/PBIT (x) (0.2) 0.6 0.1 0.0
Net debt/Equity (x) (0.5) 1.0 0.9 0.3
ROE (%) (28.2) 12.7 32.2 25.8 ROCE (%) (13.2) 4.5 17.2 17.0
Per Share Data & Valuation Ratios
Diluted Adj EPS (INR) (8.9) 2.7 10.9 10.9
Adj EPS growth NA NA 297.9 0.1
Book value (INR) 27.5 29.6 37.9 46.2
DPS (x) 0.0 0.5 2.2 2.2 P/E (x) NA 24.9 6.3 6.3
EV/EBITDA (x) (15.4) 6.7 4.6 4.7
Price/Book (x) 2.5 2.3 1.8 1.5
Dividend yield (%) 0.0 0.8 3.2 3.2
Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate
Revenue & margin growth trend
Source: Company, Elara Securities Estimate
Profit trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
(2.1)
7.5 9.9
8.2
-5
0
5
10
15
0
200,000
400,000
600,000
800,000
FY15 FY16E FY17E FY18E
(%)
(INR
mn
)
Net operating income (LHS) EBITDAM (RHS)
(20,000)
(10,000)
0
10,000
20,000
30,000
FY15 FY16E FY17E FY18E
(INR
mn
) Reported PAT
(13.2) 4.5 17.2 17.0
(28.2)
12.7
32.2 25.8
(40) (30) (20) (10)
0 10 20 30 40
FY15 FY16E FY17E FY18E
(%)
ROCE ROE
Mangalore Refinery
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43 Elara Securities (India) Private Limited
MRPL: improvement in core performance
There has been a lot of volatility in performance of MRPL during the past few quarters, due to inventory losses as well as stabilization issues post refinery phase III expansion. However, our management interaction reveals the company has been able to stabilize its operations.
Further, there has been a steady improvement in core GRM, which further underscores guidance. The company has reported a core GRM of USD 8.4/bbl in Q3FY16 vs USD 5.3/bbl in Q2FY16 and USD 6.7/bbl in Q2FY15.
Exhibit 1: Consistent improvement in core GRM
Source: Company, Elara Securities Research
Full utilization of PPU could be the next trigger
For PPU to run at 100% utilization, petro fluidized catalytic cracking unit (PFCCU) has to run at full utilization. However, due to technical issues, PFCCU hasn’t been able to run at high utilization levels in the past few months. However, our recent interaction with management suggests PPU is already running at full utilization, which indicates issues have been resolved. Also, polypropylene is being well received in the market, which bodes well for the company.
Commissioning of ISPRL in FY17
Although MRPL commissioned single point mooring (SPM) in 2013, it hasn’t been able to benefit from it as the infrastructure isn’t ready. ISPRL is expected to be commissioned in FY17. This would results in savings of USD 0.5/bbl on freight. It also would allow access to a larger variety of crude, which would boost refining margin.
Scope for improvement in crude cost
The DCU can use cheaper crude oil while still maintaining a good product yield. To date, we are yet to see the full impact of reduction in API of the crude basket. Once the company achieves this, it should see improvement in GRM. We note API of MRPL’s crude basket in FY15 is still slightly higher than that of Essar Oil in FY11, when Essar Oil’s complexity was just 6.1.
Exhibit 2: API of the crude basket used by MRPL
Source: Company, Elara Securities Research
Retail marketing: new avenue for growth
MRPL already has a license to open upto 500 retail outlets. With Board approval in place, the company is planning to open upto 100 retail outlets. With refining being volatile, its presence in the marketing segment would bring about stability to the business.
OMPL to stabilize in FY17
Although OMPL was commissioned in September 2014, it has been running at ~75% utilization due to unavailability of aromatic rich naphtha feedstock as per requirements. It partly sourced feedstock from MRPL and some from imports. However, post the OMPL-MRPL merger, MRPL is changing its crude basket to produce aromatic rich naphtha. OMPL is expected to fully stabilize in FY17 and contribute meaningfully towards the merged entity, MRPL-OMPL. We expect OMPL to clock in an EBITDA of INR 12.8bn in FY17E and INR 13.2bn in FY18E with a PX delta of USD 350/tonne and USD 325/tonne in FY17E and FY18E, respectively, and Benzene delta of USD 260/tonne and USD 240/tonne in FY17E and FY18E, respectively.
Exhibit 3: OMPL key data
FY17E FY18E 5 -year average
PX – Naphtha (USD/tonne) 350 325 486
Benzene-Naphtha (USD/tonne) 260 240 286
EBITDA (INR bn) 12.8 13.2 NA
Source: Elara Securities Estimate
Valuation: reiterate Buy with a TP of INR 90
We estimate an EBITDA of INR 40.2bn in FY18, implying an EBITDA CAGR of 41% over FY14-18E. We arrive at a valuation of INR 82 for the standalone company on 5.5x FY18E EBITDA of INR 39.8bn. We value OMPL at INR 8 on 6.0x FY18E EV/EBITDA. We recommend BBuy with a TP of INR 90.
(8)
(6)
(4)
(2)
0
2
(2)
0
2
4
6
8
10
1QFY
11
3QFY
11
1QFY
12
3QFY
12
1QFY
13
3QFY
13
1QFY
14
3QFY
14
1QFY
15
3QFY
15
1QFY
16
3QFY
16
(USD
/bb
l)
(USD
/bb
l)
Core GRM Spread over Singapore GRM
88
90
92
94
96
98
100
102
104
106
FY11 FY12 FY13 FY14 FY15
Rela
tive
to F
Y11
API
DCU allows the use of cheaper crude as reflected by lower API, resulting in better GRM from Q3FY15; it could go down further
Mangalore Refinery
44 Elara Securities (India) Private Limited
Exhibit 4: Valuation
EBITDA FY18E (INR bn) 40.22
Target EV/EBITDA (x) 5.5
EV (INR bn) 221.3
Net debt (INR bn) 65.1
Target Market cap (INR bn) 156.2
Valuation of refining business (INR/share) 82
Valuation of stake in OMPL (INR/share) 8
Target price (INR/share) 90
Source: Elara Securities Estimate
Exhibit 5: Major assumptions
FY15 FY16E FY17E FY18E
Throughput (mn tonnes) 14.7 14.9 15.0 15.0
Core GRM (USD/bbl) 3.4 6.4 6.8 6.7
Exchange rate (USD-INR) 61.4 64.6 67.2 68.0
Source: Company, Elara Securities Estimate
Mangalore Refinery
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45 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
24-Jan-2014 Buy INR 65 INR 42
2
16-Apr-2014 Buy INR 67 INR 51
3
20-May-2014 Accumulate INR 78 INR 68
4
27-Aug-2014 Buy INR 79 INR 61
5
14-Nov-2014 Buy INR 76 INR 57
6
13-Feb-2015 Buy INR 101 INR 59
7
9-Mar-2015 Buy INR 103 INR 68
8
22-May-2015 Buy INR 111 INR 68
9
9-Jul-2015 Buy INR 120 INR 76
10
7-Aug-2015 Buy INR 105 INR 82
11
29-Oct-2015 Buy INR 90 INR 57
Guide to Research Rating BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
1
2
3
4 5 6
7 8
9
10
11
20
30
40
50
60
70
80
90
Jan
-12
Mar
-12
May
-12
Jul-1
2
Sep
-12
No
v-12
Jan
-13
Mar
-13
May
-13
Jul-1
3
Sep
-13
No
v-13
Jan
-14
Mar
-14
May
-14
Jul-1
4
Sep
-14
No
v-14
Jan
-15
Mar
-15
May
-15
Jul-1
5
Sep
-15
No
v-15
Jan
-16
Mar
-16
Not Covered Covered
Elara Securities (India) Private Limited
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Disclosures & Confidentiality for non U.S. Investors The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara Securities (India) Private Limited or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Elara Securities (India) Private Limited or any of its affiliates have not independently verified all the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this information. Elara Securities (India) Private Limited or any of its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for or solicit investment banking or other business from any company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This Note is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Elara Securities (India) Private Limited or any of its affiliates to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This Information is subject to change without any prior notice. Elara Securities (India) Private Limited or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Elara Securities (India) Private Limited is under no obligation to update or keep the information current. Neither Elara Securities (India) Private Limited nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an indication that there has been no change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed to Elara Securities (India) Private Limited.
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Elara Securities (India) Private Limited’s business, amongst other things, is to undertake all associated activities relating to its broking business.
The activities of Elara Securities (India) Private Limited were neither suspended nor has it defaulted with any stock exchange authority with whom it is registered in last five years. However, during the routine course of inspection and based on observations, the exchanges have issued advise letters or levied minor penalties on Elara Securities (India) Private Limited for minor operational deviations in certain cases. Elara Securities (India) Private Limited has not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has the certificate of registration been cancelled by SEBI at any point of time.
Elara Securities (India) Private Limited offers research services primarily to institutional investors and their employees, directors, fund managers, advisors who are registered or proposed to be registered.
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Details of Associates of Elara Securities (India) Private Limited are available on group company website www.elaracapital.com
Elara Securities (India) Private Limited is maintaining arms-length relationship with its associate entities.
Research Analyst or his/her relative(s) may have financial interest in the subject company. Elara Securities (India) Private Limited does not have any financial interest in the subject company, whereas its associate entities may have financial interest. Research Analyst or his/her relative does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Elara Securities (India) Private Limited does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Associate entities of Elara Securities (India) Private Limited may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relative or Elara Securities (India) Private Limited or its associate entities does not have any other material conflict of interest at the time of publication of the Research Report. Research Analyst or his/her relative(s) has not served as an officer, director or employee of the subject company.
Research analyst or Elara Securities (India) Private Limited or its associate entities have not received any compensation from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities have not managed or co-managed public offering of securities for the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company or third party in connection with the Research Report in the past twelve months.
Disclaimer for non U.S. Investors
The information contained in this note is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Elara Securities (India) Private Limited
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Disclosures for U.S. Investors The research analyst did not receive compensation from Reliance Industries Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited, Chennai Petroleum Corporation Limited and Mangalore Refinery and Petrochemicals Limited.
Elara Capital Inc.’s affiliate did not manage an offering for Reliance Industries Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited, Chennai Petroleum Corporation Limited and Mangalore Refinery and Petrochemicals Limited.
Elara Capital Inc.’s affiliate did not receive compensation from Reliance Industries Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited, Chennai Petroleum Corporation Limited and Mangalore Refinery and Petrochemicals Limited in the last 12 months.
Elara Capital Inc.’s affiliate does not expect to receive compensation from Reliance Industries Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited, Chennai Petroleum Corporation Limited and Mangalore Refinery and Petrochemicals Limited in the next 3 months.
Disclaimer for U.S. Investors
This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it should not be relied upon as such.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These “forward-looking statements” are not guarantees of future performance and are based on numerous current assumptions that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these “forward-looking statements” and financial information.
Elara Securities (India) Private Limited
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