Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Petroleum (HPCL)
Energy
Results matter little; valuations reflect high skepticism on policy reforms. HPCL
reported better-than-expected 3QFY11 net income at `2.1 bn versus our estimate of -
`11.3 bn due to compensation of `17.5 bn from the government in 3QFY11 versus nil
assumed by us. We maintain our BUY rating given 44% potential upside to our revised
target price of `490 (`585 previously). Key downside risk stems from higher-thanexpected
net under-recoveries.
Government compensation boosts earnings
HPCL reported 3QFY11 EBITDA at `7.8 bn versus `24.8 bn in 2QFY11 and `3.5 bn in 3QFY10; our
estimate was at -`8.8 bn. The stronger-than-expected performance was due to (1) compensation
of `17.5 bn from the government in 3QFY11 versus nil assumed by us and (2) higher-thanexpected
refining margins at US$5.1/bbl. We note that HPCL has borne `5.4 bn as net underrecovery
in 9MFY11. However, we would not extrapolate the subsidy-sharing arrangement for
9MFY11 to estimate FY2011E earnings as the final subsidy-sharing arrangement will not be known
until 4QFY11E results.
Refining margins and throughput higher qoq
HPCL’s two refineries crude throughput stood at 4.1 mn tons (+34.9% qoq and +9.9% yoy) in
3QFY11. 3QFY11 refining margin was US$5.1/bbl versus US$2.7/bbl in 2QFY11 and -US$0.3/bbl
in 3QFY10. 3QFY11 sales volumes (domestic) increased 5.5% yoy and 10.8% qoq to 6.5 mn tons.
The yoy growth in sales was led by strong growth in gasoline, diesel, LPG and ATF sales, which
was partially offset by a decline in sales of fuel oil and naphtha.
Valuations attractive; stock trading at 0.7X P/B and 8.6X FY2012E EPS on very reasonable
assumptions
We find HPCL’s current valuations compelling with the stock trading at 0.7X BV, which is at the
lower end of its historical trading band. On a P/E basis, the stock is currently trading at 8.6X
FY2012E EPS of `39.5 on very reasonable assumptions of (1) no diesel deregulation in FY2012E
and (2) net under-recovery of `17.1 bn versus `12.3 bn in FY2010. We highlight that the stock is
discounting a scenario of the government providing 53% compensation to the downstream
companies. We retain our BUY rating on the stock given the stock offers a potential upside of
44% to our revised target price of `490 (`585 previously).
Revised earnings for delay in diesel deregulation and higher net under-recoveries
We have revised our FY2011-13E EPS to `46.3 (-11.3%), `39.5 (-18.9%) and `52.2 (-2.2%) to
reflect (1) higher net under-recoveries in FY2011-12E, (2) delay in diesel deregulation to FY2013E,
(3) modestly higher refining margins and (4) other minor changes.
How cheap is cheap?
We find HPCL’s current valuations compelling with the stock trading at 0.7X FY2012E BV,
which is at the lower end of its historical trading band (see Exhibit 1). We note that HPCL’s
value will only increase as the government will give sufficient amount of compensation to
ensure reasonably profits for the downstream oil companies. We model HPCL’s FY2012E EPS
at `39.5 (after factoring in net under-recovery of `17.1 bn). This compares with average
FY2007-10 EPS of `35.6 and FY2010 EPS of `51.6 (net under-recovery of `12.3 bn). We
note that FY2009 was a bad year and earnings were pulled down due to high inventory
losses (`17.4 bn) arising from a steep correction in crude oil prices.
We note that our FY2012E EPS of `39.5 factors in very reasonable assumptions of (1) no
diesel deregulation in FY2012E and (2) net under-recovery of `17.1 bn versus `12.3 bn in
FY2010. We highlight that the stock is discounting a scenario of the government providing
53% compensation to downstream companies.
Key financial and operating details of 3QFY11 results
Exhibit 2 gives key highlights of HPCL’s 3QFY11 results and compares the same on yoy and
qoq basis. We do not see significant merit in comparison of quarterly results given the high
volatility in the timing and quantum of compensation from the government of India and
contribution from upstream companies.
Compensation (cash) from the government and discounts from the upstream oil
companies. HPCL received ``17.5 bn as compensation from the government in 3QFY11.
HPCL received `11.4 bn of discounts from the upstream companies in 3QFY11 compared
to `8.1 bn in 2QFY11 and `9.6 bn in 3QFY10. Its net under-recovery was `5.4 bn
compared to over-recovery of `12.2 bn in 2QFY11 and under-recovery of `0.9 bn in
3QFY10. HPCL’s gross under-recovery in 9MFY11 was `102.6 bn and net under-recovery
was `22.6 bn.
Refining margins improve qoq. HPCL’s 3QFY11 refining margin was US$5.1/bbl versus
US$2.7/bbl in 2QFY11 and -US$0.3/bbl in 3QFY10. We note that the company had
reported adventitious gains of `4.8 bn in 3QFY11 versus `3 bn in 2QFY11.
Refining throughput higher; sales volumes increased yoy. HPCL’s two refineries
processed 4.1 mn tons of crude in 3QFY11 compared to 3 mn tons in 2QFY11 and 3.7
mn tons in 3QFY10. HPCL’s sales volume (domestic) was 6.5 mn tons for 3QFY11 (+5.5%
yoy and +10.8% qoq).
Earnings revisions and key assumptions behind earnings model
We have revised our FY2011E, FY2012E and FY2013E EPS estimates to `46.3, `39.5 and
`52.2 from `52.2, `48.7 and `53.4. We discuss key assumptions (see Exhibit 3) behind our
earnings model below.
Compensation from government and discount from upstream companies. We
model HPCL to receive compensation of `94.3 bn, `103.1 bn and `63 bn from the
government in FY2011E, FY2012E and FY2013E. We assume HPCL to receive a discount
of `55.1 bn for FY2011E, `60.1 bn for FY2012E and `39.2 bn for FY2013E from the
upstream companies. We assume net under-recoveries at `16 bn, `17.1 bn and `15.4 bn
for FY2011E, FY2012E and FY2013E against `12.3 bn in FY2010.
Refining margins. We model refining margin for HPCL at US$4.3/bbl in FY2011E,
US$4.8/bbl in FY2012E and US$5.4/bbl in FY2013E compared to US$3/bbl in FY2010. We
assume adventitious gains at `10.8 bn in FY2011E given 9MFY11’s `11 bn adventitious
gains and no gains or losses for the future years.
Crude throughput. We model crude throughput at 14.5 mn tons, 17.2 mn tons and
18.8 mn tons in FY2011E, FY2012E and FY2013E versus 15.8 mn tons in FY2010.
Marketing margins. We model marketing margin on gasoline and diesel at –`2,525/ton
and –`2,154/ton in FY2011E and `1,350/ton and -`2,892/ton in FY2012E compared to –
`3,929/ton and `1,113/ton and in FY2010. We expect diesel prices to be deregulated by
April 1, 2012 with the easing of inflationary concerns. We do not assume any increase in
LPG and kerosene retail prices throughout our forecast period.
Exchange rate. We assume `/US$ exchange rates for FY2011E, FY2012E and FY2013E
at `45.6/US$, `45.5/US$ and `44/US$. A stronger rupee is moderately negative for
earnings of HPCL for the refining segment although it is positive for marketing margins of
controlled products in that under-recoveries will be likely lower
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Petroleum (HPCL)
Energy
Results matter little; valuations reflect high skepticism on policy reforms. HPCL
reported better-than-expected 3QFY11 net income at `2.1 bn versus our estimate of -
`11.3 bn due to compensation of `17.5 bn from the government in 3QFY11 versus nil
assumed by us. We maintain our BUY rating given 44% potential upside to our revised
target price of `490 (`585 previously). Key downside risk stems from higher-thanexpected
net under-recoveries.
Government compensation boosts earnings
HPCL reported 3QFY11 EBITDA at `7.8 bn versus `24.8 bn in 2QFY11 and `3.5 bn in 3QFY10; our
estimate was at -`8.8 bn. The stronger-than-expected performance was due to (1) compensation
of `17.5 bn from the government in 3QFY11 versus nil assumed by us and (2) higher-thanexpected
refining margins at US$5.1/bbl. We note that HPCL has borne `5.4 bn as net underrecovery
in 9MFY11. However, we would not extrapolate the subsidy-sharing arrangement for
9MFY11 to estimate FY2011E earnings as the final subsidy-sharing arrangement will not be known
until 4QFY11E results.
Refining margins and throughput higher qoq
HPCL’s two refineries crude throughput stood at 4.1 mn tons (+34.9% qoq and +9.9% yoy) in
3QFY11. 3QFY11 refining margin was US$5.1/bbl versus US$2.7/bbl in 2QFY11 and -US$0.3/bbl
in 3QFY10. 3QFY11 sales volumes (domestic) increased 5.5% yoy and 10.8% qoq to 6.5 mn tons.
The yoy growth in sales was led by strong growth in gasoline, diesel, LPG and ATF sales, which
was partially offset by a decline in sales of fuel oil and naphtha.
Valuations attractive; stock trading at 0.7X P/B and 8.6X FY2012E EPS on very reasonable
assumptions
We find HPCL’s current valuations compelling with the stock trading at 0.7X BV, which is at the
lower end of its historical trading band. On a P/E basis, the stock is currently trading at 8.6X
FY2012E EPS of `39.5 on very reasonable assumptions of (1) no diesel deregulation in FY2012E
and (2) net under-recovery of `17.1 bn versus `12.3 bn in FY2010. We highlight that the stock is
discounting a scenario of the government providing 53% compensation to the downstream
companies. We retain our BUY rating on the stock given the stock offers a potential upside of
44% to our revised target price of `490 (`585 previously).
Revised earnings for delay in diesel deregulation and higher net under-recoveries
We have revised our FY2011-13E EPS to `46.3 (-11.3%), `39.5 (-18.9%) and `52.2 (-2.2%) to
reflect (1) higher net under-recoveries in FY2011-12E, (2) delay in diesel deregulation to FY2013E,
(3) modestly higher refining margins and (4) other minor changes.
How cheap is cheap?
We find HPCL’s current valuations compelling with the stock trading at 0.7X FY2012E BV,
which is at the lower end of its historical trading band (see Exhibit 1). We note that HPCL’s
value will only increase as the government will give sufficient amount of compensation to
ensure reasonably profits for the downstream oil companies. We model HPCL’s FY2012E EPS
at `39.5 (after factoring in net under-recovery of `17.1 bn). This compares with average
FY2007-10 EPS of `35.6 and FY2010 EPS of `51.6 (net under-recovery of `12.3 bn). We
note that FY2009 was a bad year and earnings were pulled down due to high inventory
losses (`17.4 bn) arising from a steep correction in crude oil prices.
We note that our FY2012E EPS of `39.5 factors in very reasonable assumptions of (1) no
diesel deregulation in FY2012E and (2) net under-recovery of `17.1 bn versus `12.3 bn in
FY2010. We highlight that the stock is discounting a scenario of the government providing
53% compensation to downstream companies.
Key financial and operating details of 3QFY11 results
Exhibit 2 gives key highlights of HPCL’s 3QFY11 results and compares the same on yoy and
qoq basis. We do not see significant merit in comparison of quarterly results given the high
volatility in the timing and quantum of compensation from the government of India and
contribution from upstream companies.
Compensation (cash) from the government and discounts from the upstream oil
companies. HPCL received ``17.5 bn as compensation from the government in 3QFY11.
HPCL received `11.4 bn of discounts from the upstream companies in 3QFY11 compared
to `8.1 bn in 2QFY11 and `9.6 bn in 3QFY10. Its net under-recovery was `5.4 bn
compared to over-recovery of `12.2 bn in 2QFY11 and under-recovery of `0.9 bn in
3QFY10. HPCL’s gross under-recovery in 9MFY11 was `102.6 bn and net under-recovery
was `22.6 bn.
Refining margins improve qoq. HPCL’s 3QFY11 refining margin was US$5.1/bbl versus
US$2.7/bbl in 2QFY11 and -US$0.3/bbl in 3QFY10. We note that the company had
reported adventitious gains of `4.8 bn in 3QFY11 versus `3 bn in 2QFY11.
Refining throughput higher; sales volumes increased yoy. HPCL’s two refineries
processed 4.1 mn tons of crude in 3QFY11 compared to 3 mn tons in 2QFY11 and 3.7
mn tons in 3QFY10. HPCL’s sales volume (domestic) was 6.5 mn tons for 3QFY11 (+5.5%
yoy and +10.8% qoq).
Earnings revisions and key assumptions behind earnings model
We have revised our FY2011E, FY2012E and FY2013E EPS estimates to `46.3, `39.5 and
`52.2 from `52.2, `48.7 and `53.4. We discuss key assumptions (see Exhibit 3) behind our
earnings model below.
Compensation from government and discount from upstream companies. We
model HPCL to receive compensation of `94.3 bn, `103.1 bn and `63 bn from the
government in FY2011E, FY2012E and FY2013E. We assume HPCL to receive a discount
of `55.1 bn for FY2011E, `60.1 bn for FY2012E and `39.2 bn for FY2013E from the
upstream companies. We assume net under-recoveries at `16 bn, `17.1 bn and `15.4 bn
for FY2011E, FY2012E and FY2013E against `12.3 bn in FY2010.
Refining margins. We model refining margin for HPCL at US$4.3/bbl in FY2011E,
US$4.8/bbl in FY2012E and US$5.4/bbl in FY2013E compared to US$3/bbl in FY2010. We
assume adventitious gains at `10.8 bn in FY2011E given 9MFY11’s `11 bn adventitious
gains and no gains or losses for the future years.
Crude throughput. We model crude throughput at 14.5 mn tons, 17.2 mn tons and
18.8 mn tons in FY2011E, FY2012E and FY2013E versus 15.8 mn tons in FY2010.
Marketing margins. We model marketing margin on gasoline and diesel at –`2,525/ton
and –`2,154/ton in FY2011E and `1,350/ton and -`2,892/ton in FY2012E compared to –
`3,929/ton and `1,113/ton and in FY2010. We expect diesel prices to be deregulated by
April 1, 2012 with the easing of inflationary concerns. We do not assume any increase in
LPG and kerosene retail prices throughout our forecast period.
Exchange rate. We assume `/US$ exchange rates for FY2011E, FY2012E and FY2013E
at `45.6/US$, `45.5/US$ and `44/US$. A stronger rupee is moderately negative for
earnings of HPCL for the refining segment although it is positive for marketing margins of
controlled products in that under-recoveries will be likely lower
No comments:
Post a Comment