HPCL: High-cost Barmer Unit may Prove a Drag

Interpreting Numbers & Trends Oil marketer may be a key beneficiary of the recent diesel price decontrol which strengthens the case for a re-rating of company

The recent diesel pricing reforms have brought a renewed focus on oil marketing companies, with a buzz about a potential re-rating.
State-run Hindustan Petroleum’s performance being more skewed towards the domestic marketing business compared to its peers, the company could be a key beneficiary of the government’s subsidy reduction measures. It recently grabbed headlines by announcing a refinery project in Rajasthan. However, a re-rating could be some time away.
When it comes to diesel deregulation — the benefit accrues to oil marketing companies only indirectly — better cash flows will bring down working capital loans and, therefore, the interest burden. However, there are concerns whether heightened competition will negate this. A research report from Axis Securities says that total deregulation in diesel could actually harm the profitability of oil marketing companies since private firms such as RIL and Essar will find retailing in India lucrative. The report says that complete deregulation may push prices towards export parity; will result in $3.1 per barrel decline in GRMs. At present, the subsidies are calculated assuming trade parity pricing — 80% import parity and 20% export parity.
Against this backdrop, HPCL’s recently announced refinery project in Rajasthan may not be much to cheer about. The company’s announcement puts the estimated project cost of . 37,230 crore for the 9-million tonne per annum refinery-cum-petrochemical complex at Barmer, to be high compared to the refineries built in India so far. At this price target, the cost per million tonne capacity exceeds . 4,000 crore, which is more than double what other recent refineries have cost. For instance, IndianOil’s 15-million tonne per annum (MTPA) refinery at Paradip will come up at an investment of . 30,000 crore. Similarly, BPCL completed its 6-MTPA Bina refinery at around . 12,000 crore of capital expenditure, with the management saying that a . 1,000-crore debottlenecking will take it to 9 MTPA by 2015. Similarly, Essar Oil’s muchdelayed refinery at Vadinar was built at a capital cost of . 24,000 crore for 20-MTPA capacity. All these recent refineries have a capital expenditure of less than . 2,000 crore per million tonne capacity. “Even at the Nelson Complexity Index of 12, the capital cost of this project would be $3,000/bpd/complexity, which is on a very high side,” the head of research of a Mumbai-based brokerage house said while declining to be named.
However, many others would rather wait for more clarity. It is too premature to comment on the project at present, says Deepak Pareek, analyst - oil & gas, Prabhudas Lilladher. He says that they are unaware of the refinery configuration, the type of crude they will process and the type and capacity of the petrochemical complex. What is however clear is that the capital cost of setting up such facilities has grown by 15% over 2009 going by CERA IHS downstream capex index and that the trend is expected to continue, he says.
Till there is more clarity on these details, the planned refinery will have to be regarded as India’s costliest and may hold little promise for investors.