HPCL-Results above expectation, BUY :: Emkay

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HPCL

Results above expectation, Maintain BUY

BUY

CMP: Rs.454                                        Target Price: Rs.515

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n     HPCL reported results which were above our estimates at EBIDTA and PAT Level, primarily due to issuance of oil bonds/Cash receivables during the quarter

n     EBIDTA at Rs.24.8bn, against Rs1.7bn, YoY, mainly due to inventory Gain and issuance of oil bonds/cash receivables from the government of India

n     Average gross refining margin for 1H FY11 was at $3.2/bbl as compared to $3.8/bbl (decline by 18% YoY) below our expectation of $3.7/bbl.

n     Valuations look attractive at 1x FY12E ABV, mainly due to recent change in reforms, Continue BUY rating with TP of Rs.515

Highlights of the results

HPCL reported results which were above our estimates at EBIDTA and PAT Level,

primarily due to inventory gain (Rs.13.6bn) and issuance of oil bonds/cash receivables

(Rs.28.3bn) during the quarter. Revenue for the quarter was at Rs.308.7bn (against our

expectation of Rs.281bn), growth of 25%, mainly on account of cash compensation

received from the government. EBITDA during the quarter was at Rs.24.8bn as against

Rs.1.7bn a year ago. During the quarter company has posted Inventory gain of

Rs.13.6bn as compared to inventory gain of Rs.19bn in Q2FY10. Interest cost declined

by 11.8% to Rs.2.1bn. During the quarter the company reported net profit of Rs.20.8bn,

as against net loss of Rs.1.3bn in Q2 FY10, mainly due to inventory gain and issuance

of oil bonds/cash receivables by the government.

The company received upstream discount of Rs. 22.8bn, in respect of crude

Oil/LPG/SKO purchased from them has been accounted during the quarter. The

company has received budgetary support of Rs.28.3bn from the GOI for the underrecovery

of cooking fuel and auto fuel during the quarter.

Better clarity on subsidy sharing mechanism

After years of ad-hoc subsidy arrangements, a proper subsidy sharing mechanism is

being worked out. The Oil secretary S Sudarshan has clarified that the 1/3rd of the

under recovery would be absorbed by the upstream companies, the government would

certainly absorb 50% or more, the balance 17% would be based on the companies

performance over the quarter.

Marginal decrease in Interest cost

During the quarter, interest costs reduced by 11% from Rs2.4bn in Q2 FY10 to Rs.2.1bn

in Q2 FY11.

Average GRM was at $2.6 per bbl as against $1.9 per bbl on YoY

Lower product demand, especially in light distillate, has seen product spreads reducing

in Q2FY11. Average gross refining margin was at $2.6/bbl as compared to $1.9/bbl

(Increase of 42% YoY). However, we expect GRM’s to improve in the coming quarters,

in tandem with the improvement in the global economy, which helps to improve the

petro product spreads.

Valuations

Though there has been some clarity on sharing mechanism (upstream companies sharing

entire 1/3rd of the total under recovery), more budgetary support from GOI is needed to

keep HPCL in black. We expect GOI’s budgetary support to increase only if it is able to

garner larger funds from disinvestment or by full implementation of Kirit Parekh committee

recommendation. At CMP of Rs.453, the stock trades at 1.1x and 1.0x FY11E and FY12E

P/BV. We maintain our BUY rating on the stock with target price of Rs.515.