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UBS Investment Research
Hindustan Petroleum
Lower PT on possible refinery delay
„ Lower price target by 14% to Rs475; maintain Neutral rating
We lower our price target by 14% from Rs554 to Rs475 on a possible delay in the
commissioning of the Bhatinda refinery (51% stake, 180kbpd, complexity >9). We
had expected the Bhatinda refinery to be operational in the second quarter of FY11.
However, we now think it will be delayed by 6-9 months and full-year production
will occur in FY14 (previously forecast for FY13). We attribute the delay to slower
execution.
„
Full capacity utilisation in FY14 versus our earlier estimate of FY13
HPCL expects the Bhatinda refinery, a joint venture between HPCL and Mittal
Energy, to be mechanically complete by May 2011. Management has previously
stated that they expect the refinery to be operational by September 2011. However,
based on our analysis of recent industry newsletters and the history of these types
of projects, we expect a substantial delay and assume it will be operational by
March 2012. We expect the new refinery to earn US$2-3/bbl higher gross refining
margin (GRM) compared to HPCL’s existing refineries.
„ Diesel deregulation another catalyst, but higher oil price is negative
We factor in diesel deregulation in FY12. However, this could be delayed if oil
prices rise sharply. At this point, we prefer upstream (ONGC) over downstream.
We believe there is near-term upside to the stock if the government hikes diesel
prices by more than our expectation of 5-6%.
„ Valuation: lower price target to Rs475; maintain Neutral rating
We base our price target of Rs475 on 1.2x FY12E book. Earlier, we had ascribed a
40% premium to FY12E P/B (on deregulation and refinery commissioning in
September 2011) and valued the stock at 1.4x FY12E P/B. We now value the
stock at 1.2x FY12E P/B due to a possible delay in the refinery commissioning.
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