Indiainfoline - HPCL

Key takeaways from the Analyst Meet were as follows:

Breakup of Under recoveries

(Rs bn)	FY07 E	FY06	H1 FY07 (HPCL)
Gross Under recovery	735.0	385.0	79.0
Price Increases	92.0	37.5	8.0
Trade Parity/Refinery Discounts	90.0	39.5	7.5
Upstream Discounts	240.0	120.0	24.5
Oil Bonds	283.0	141.5	29.0
Net Under recovery	30.0	46.5	10.0

Refining segment

The current world refining capacity at 85mbpd seems to be tight as considering the fuel and loss the utilization rate is over 100%.

HPCL expects the demand of petroleum products to increase from the current levels of 109MMT to 135MMT by 2012. The refining capacity during the same period is seen to increase from 129.8MMT to 220MMT. The increased refining capacity will translate into higher dependence on imports of crude oil from current levels of 75% to 85% by 2012.

Against the name plate capacity of 13mtpa, the refinery has been operating at 16mtpa per annum over the last 3 quarters. For the first half the total throughput for the refineries was at 8.3MMT translating into a capacity utilization of 127%. This has been possible on the back of low cost modifications which the company carried out at the Mumbai and the Visakh refineries. The modifications include small expansions in primary and secondary processing capacities at Mumbai and also 30% increase in Diesel Hydrotreater capacity at Visakh refinery. Consequently, the yields have improved considerably. Production of LPG was up from 2.45% to 3.43% whereas for MS it was from 3.1% to 5.9% and for LOBS it increased to 4.4% from 4.1%. The total distillate yield at the Visakh refinery increased to 78%.

The crude basket too has improved for the company as the basket now consists of 89 types as against 20+ in FY03, thus reducing dependence on few suppliers. The Visakh refinery now processes 52% of sour crude against 44% last year.

All these initiatives have translated into a GRM improvement from US$5/bbl to US$5.87/bbl converting into gains of Rs6.3bn.

The company aims to start production of Euro III and Euro IV grade fuels from Q4 FY07 at Mumbai refinery (Rs18.5bn capex) and from Q1 FY08 at Visakh refinery (Rs21.5bn capex).

The company is taking further initiatives to improve the GRMs of the existing refineries, which include:

• Mixed Xylene Plants

• Propylene recovery units

• LOBS – Group II plants

• SPM – For VLCC handling at Visakh

• Visbreaker

• Delayed Coker at Visakh

• Increase in FCCU capacity

• Bulk bitumen exports facility

The company is initiating Oil price risk management activity and has appointed M/s Ernst and Young for the assisting them.

Marketing segment

By December 2007, HPCL will completely automate 2,000 of its retail outlets (Accounting for 70% of MS/HSD sales). This activity is likely to increase the throughput from the current levels of 135KL/day to over 150KL/day.

The company is putting up 750 low cost (Rs1.5-2.5mn) retail outlets in the rural areas, where it feels the IRR could be as high as 50%.

An LPG volume for HPCL increased by 68% and the company has a market share of 35% for the product.

HPCL is currently in process of constructing 2 pipelines, Mundra-Delhi and Pune-Solapur. It expects to save costs to the tune of Rs2.5bn post the commencement of the two pipelines.

Future strategies

• Consolidating in downstream sector

• Expanding Refining Capacity: The company is planning to increase the capacity at the Visakh refinery to 15MMTPA. Post expansion it is targeting a distillate yield of 83% and incremental GRMs of about US$4/bbl
• It is also setting up a grass root refinery of 9mmtpa at Bhatinda in Punjab at an estimated cost of Rs167bn (including pipelines). The refinery will have a capacity to process 100% sour crude. Financial closure for the project is likely to happen in Q4 of FY07.

• Significant Presence in Upstream Sector

• The company has bid for 26 blocks in NELP 6 in partnership with ONGC/GAIL/GSPC/OIL, etc.
• HPCL has been awarded: Block 56 in Oman in consortium with Oilex-Australia and others – HPCL Share 12.5%; A block in Carnivorn Basin Australia in consortium with Oilex and others – HPCL share 20%
• The Joint Venture Company of HPCL – Prize Petroleum is working on 3 onshore marginal fields and has been awarded a cluster of 7 group in offshore near Mumbai High fields. Also it has been given a 50% share in Sanganpur marginal field near Mehsana, Gujarat.

• Diversification into Petrochemicals

• HPCL is also looking forward to setup a petrochemical complex at Visakh (SEZ).

• Entry in Gas & Wind Power

• Looking to make big strides into city gas distribution projects via JV with GAIL and tieups with GSPC in cities like Visakh, Vijaywada, Hyderabad, Indore, Kota (Rajasthan), Ahmedabad, Surat and Baroda.
• It is exploring possibility of setting up a 5MMTPA LNG terminal at Mundra.
• Also it is setting up 2 wind power projects each generating 25MW in 2 phases. The capital outlay for the firs phase is Rs1.4bn.

Outlook

Despite several initiatives by the company to improve its operating performance, we continue to have a skeptical view about the future. Our skepticism is on the premise that of the Rs283bn worth of bonds, for which the in principle approval from the government has been received; only Rs143bn for the first half has been assured. For the remaining it is dependent on what the actual under recovery is. Also there are talks moving around that in the wake of the ensuing elections, Government might reduce petrol and diesel prices. This step if initiated could take the oil marketing companies back to red.