HPCL – At steep discount vs. other OMCs; Buy: Anand Rathi

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HPCL – At steep discount vs. other OMCs; reiterate Buy


 Government compensation boosts profits. HPCL reported
2QFY11 PAT of `20.9bn, thanks to last-minute compensation from
the government for 1HFY11 under-recoveries. We continue to prefer
HPCL among oil marketing companies (OMCs) on valuation
grounds. HPCL currently trades at 30% discount to BPCL on oneyear
forward PE as against historical 10% discount. Also, HPCL
would be the key beneficiary of any further progress on fuel deregulation,
given its relatively higher exposure to marketing volumes.


 Refining margin disappoints HPCL’s GRM declined to
US$2.7/bbl in 2Q (US$3.7 in 1Q), though the Singapore-Dubai
GRM was up US$0.5/bbl qoq at US$4.2/bbl. While we expect
refining margins to achieve mid-cycle level in FY12-13, we believe
they will be subdued in the next 6-12 months.

 Uncertainty in subsidy-sharing continues. OMCs bore 26% of
1H under-recoveries, which were significantly higher than our
expectations. We await clarity and maintain that ~10% of underrecoveries
would be parked in OMCs.

 Earnings. We marginally trim our FY11-12e earnings factoring in
actual for FY10. We also introduce FY13 estimates.

 Valuation. We raise our target price to `520 from `480 based on: i)
PE of 8.5x (from 8x) FY12e EPS and ii) greater value of investments.
We re-iterate Buy as we prefer HPCL among other OMCs due to its
steep valuation discount. HPCL currently trades at 30% discount to
BPCL on one-year forward PE as against historical 10% discount.
Risks: Unfavorable decision on diesel de-regulation or subsidy sharing,
lower refining margins, higher crude prices.