Crude prices will continue to be less than $45 – HPCL

Update on the Indian Equity Market:

On Wednesday, NIFTY closed in red at 11,132 (-0.3%). Top gainers in NIFTY50 were Axis Bank (+6.7%), Titan (+4.9%) and Power Grid (+3.6%). The top losers were Hero Motocorp (-3.3%), BPCL (-3.1%) and HUL (-3.1%). Top sectoral gainers were PVT BANK (+0.7%), MEDIA (+0.5%) and BANK (+0.4%) and sectoral losers were PSU BANK (-1.6%), AUTO (-1.3%) and IT (-1.1%).
Excerpts of an interview with Mr M.K.Surana, CMD, HPCL with ET now dated 22^nd July 2020:

• Demand had picked up quite sharply after June and it reached around 88% or so. Normally in the Q2 of the financial year, because of the onset of the monsoon, demand reduces generally on a tonnage basis. The same effect is being seen this July as well.
• It is slightly aided by some of the localised lockdowns in Karnataka, Maharashtra and other states. That’s why demand has been lower on the diesel side. Petrol demand is good more or less.
• It is still 84% of normal and the trend is in line with what happens every year in the second quarter of the year as soon as the monsoon sets in.
• Last year the monsoon was slightly delayed and so if you see year on year, that will also have some impact and this time it is slightly early.
• There has not been any substantial worrisome trend as such. Rather it has been a consistently improving trend as far as demand is concerned. The impact that is seen is only because of the monsoon and the local lockdowns.
• Next month, it should rebound to June level. Beyond 90%, definitely it will take some time to reach 100% as industrial and construction activities pick up. That should happen in the third quarter of the year.
• He has maintained this view for a long time that the oil refining and marketing companies did not get fully valued the way our markets work. There is a huge potential, huge value in terms of the asset base.
• Total demand consists of two parts – one is essential requirements for normal transportation of the people, for agriculture and industrial use. There the price elasticity has not been seen in the past to any extent.
• As far as exports are concerned, it anyway happens on international pricing and one should remember that even the domestic prices are aligned to international pricing and the exports or imports whatever happens on the international pricing.
• HPCL projects are at a very advanced stage. They will be trying to complete major projects like Vizag refinery expansion or Mumbai refinery expansion in the next calendar year.
• Every year they take up some new projects that they may prioritise depending on the situation, but as far as all the projects which are already onsite and under construction are concerned, they do not have a rethinking on that.
• They are comfortable with the borrowing level, as of today, their debt to equity ratio is less than one and long-term debt is less than around Rs 23,000 crore. Even short term debt they have brought down substantially to around Rs 32,000 crore.
• Indian fuel retailing was started by MNCs like Esso, Burmah Shell, Caltex etc. Some of these MNCs after nationalisation became PSEs. It is done globally and it was not vastly different in India as compared to other parts of the world.
• As far as the demand front is concerned, 85-90% of the demand has already come. By the end of June, they had touched 91%. The onset of monsoon may cause some reduction in the diesel demand but it will pick up. On the demand front, it has shown a very smart and quick and V-shape recovery and they are very happy with that.
• As far as the prices of crude are concerned, they have remained in the $40 range and they think that it will continue to be less than $45 because some of the shale players will start returning as they are comfortable with $40 as the breakeven price.
• With the reasonable crude prices and with improving cracks demand recovery, he believes that they would do well.

Consensus Estimate: (Source: market screener and investing.com websites)

• The closing price of HPCL was ₹ 228/- as of 22-July-2020.  It traded at 7x/ 6x the consensus earnings estimate of ₹ 32.1/ 39.4 for FY21E/22E respectively.
• The consensus price target of HPCL is ₹ 272/- which trades at 7x the earnings estimate for FY22E of ₹4/-

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