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Hindustan Petroleum (HPCL.BO, Buy, on Conviction List)
Source of opportunity
We upgrade HPCL to Buy from Sell and add it to our Conviction List as it
represents a key defensive stock to own in case we witness oil demand
destruction due to oil prices spiking up from here. It is also the biggest
beneficiary of regulatory action leading to higher fuel prices, with the
highest sales/refining volume ratio among the OMCs. We believe that
the under-recoveries on auto fuels are likely peaking.
We believe government action raising fuel prices could happen soon as
assembly elections in some key states are scheduled to be completed by
May and would lead to lesser net-under recoveries and earnings growth
for HPCL. We forecast FY11E-13E earnings CAGR of 37% largely driven
by our expectations of lower net under-recoveries going into FY12.
Since we added HPCL to the Sell list on Oct. 8, 2010, the stock has fallen
26.9% vs. a loss of 3.3% for the Sensex (last 12m: +23.2% vs. +10.7%).
Catalyst
Key catalysts include: 1) announcement of fuel price increases resulting
in lower net losses for OMCs 2) commissioning of HPCL’s Bhatinda
refinery in FY2012; 3) correction in crude oil prices.
Valuation
We revise our earnings estimates by 5% and -18% for FY12E and FY13E
to reflect lower net under-recoveries and adjustments for Bhatinda
refinery JV. Consequently, we raise our FY12E EV/EBITDA-based 12-
month target price to Rs450 from Rs354 , implying 20% potential upside
from current levels. We note that HPCL stock is down 25% in last 6
months largely pricing in the impact of high oil prices. We expect any
correction in crude prices going forward would strengthen INR vs.
US$ and will be positive for the stock.
Key risks
Key risks include 1) Continued high global oil prices, 2) delay in fuel
prices increases, and 3) weak INR-USD rate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Petroleum (HPCL.BO, Buy, on Conviction List)
Source of opportunity
We upgrade HPCL to Buy from Sell and add it to our Conviction List as it
represents a key defensive stock to own in case we witness oil demand
destruction due to oil prices spiking up from here. It is also the biggest
beneficiary of regulatory action leading to higher fuel prices, with the
highest sales/refining volume ratio among the OMCs. We believe that
the under-recoveries on auto fuels are likely peaking.
We believe government action raising fuel prices could happen soon as
assembly elections in some key states are scheduled to be completed by
May and would lead to lesser net-under recoveries and earnings growth
for HPCL. We forecast FY11E-13E earnings CAGR of 37% largely driven
by our expectations of lower net under-recoveries going into FY12.
Since we added HPCL to the Sell list on Oct. 8, 2010, the stock has fallen
26.9% vs. a loss of 3.3% for the Sensex (last 12m: +23.2% vs. +10.7%).
Catalyst
Key catalysts include: 1) announcement of fuel price increases resulting
in lower net losses for OMCs 2) commissioning of HPCL’s Bhatinda
refinery in FY2012; 3) correction in crude oil prices.
Valuation
We revise our earnings estimates by 5% and -18% for FY12E and FY13E
to reflect lower net under-recoveries and adjustments for Bhatinda
refinery JV. Consequently, we raise our FY12E EV/EBITDA-based 12-
month target price to Rs450 from Rs354 , implying 20% potential upside
from current levels. We note that HPCL stock is down 25% in last 6
months largely pricing in the impact of high oil prices. We expect any
correction in crude prices going forward would strengthen INR vs.
US$ and will be positive for the stock.
Key risks
Key risks include 1) Continued high global oil prices, 2) delay in fuel
prices increases, and 3) weak INR-USD rate.
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