Demand will not be affected due to peak prices – HPCL

Update on the Indian Equity Market:

Markets started the week on optimism as Nifty closed the day 1.5% higher at 10,764. The optimism was such that within the Nifty index, 40 out of 50 stocks ended in green. The top gainers for Nifty 50 were M&M (+7.4%), BAJFINANCE (+6.5%) and HINDALO (+5.7%) while the losing stocks for the day BAJAJAUTO (-1.1%), GAIL (-1.0%) and BHARTIARTL (-0.9%). Ten out of 11 sectors ended the day in green led by REALTY (3.0%), AUTO (2.9%) and METAL (2.5%) while PHARMA (-0.6%) was the only sector in the red zone.

Edited excerpts of an interview with Mr M K Surana, Managing Director and Chairman, Hindustan Petroleum Corporation Ltd. (HPCL); dated 6th July 2020 from CNBC TV-18:

• Sales during the current quarter were 88% of the last year’s same quarter. As construction and industrial activities pick-up, the company expects to reach hundred percent of last year’s sales figure in the coming quarters.
• He mentioned that the demand for fuel is not expected to get affected due to peak prices. This is because the price elasticity is not profound in India due to the nature of the requirement. 
• The current situation has made people opt for personal vehicles for commuting. People are buying vehicles irrespective of the price of fuel for safety reasons. He expects this trend to continue in the coming months as well. 
• About the marketing margins, he mentioned that the rise in price of petrol and diesel is in line with global markets. Whenever the price of raw material rises, it hurts the margins of the company as the base becomes larger. 
• The prices are going up because of the rise in international crude prices. Oil marketing companies have no say in determining the final prices so the margins get affected during a surge in crude prices.
• Generally, the company derives 50% of the fuel demand from urban markets, 15% demand comes from highways and remaining 35% comes from the rural markets.
• Initially during the lockdown, the percentage of rural demand was more than highways and urban demand. As the unlocking of economy is taking place, the demand is again increasing in urban and highways whereas rural demand remains intact.

Consensus Estimate: (Source: market screener, investing websites)

• The closing price of HPCL was ₹ 216/- as of 6-July-2020. It traded at 7x/ 5x the consensus EPS estimate of ₹ 32.6/ 39.4 for FY21E/ FY22E respectively.
• The consensus target price of Rs 274/- implies a PE multiple of 7x on FY22E EPS of ₹ 39.4/-.

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