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Hindustan Petro.
Best play on reforms among
R&M companies
„Raise PO by 13% to Rs500 to reflect likely re-rating; Buy
The government on June 24 hiked fuel prices and cut taxes to cut subsidy by over
US$10bn. However, there is no clarity on subsidy sharing. It is therefore difficult to
estimate the gains from subsidy cut especially to R&M companies. Therefore
changes in HPCL’s FY12-FY13 EPS are modest. However, the good news is that
diesel would be deregulated if oil price declines by another 11%. We expect
investors to be enthused by this possibility and re-rate HPCL. To reflect the likely
re-rating we have raised PE multiple used to value HPCL to 9x from 8x earlier.
This has meant 13% upgrade in its PO to Rs500 (implies 27% potential upside).
HPCL is our top pick among R&M companies as it is the cheapest on P/BV at
1.0x FY12. In our view, it also has good leverage to reforms. We retain Buy. .
R&M companies high risk-high return play on reforms
R&M companies’ stock price reacts more positively to reforms than upstream.
R&M company stocks were up far more than upstream peers after the fuel price
hikes made in June 2010 with HPCL being the best performer.
Risks to R&M: high share in subsidy & large inventory loss
The main driver of R&M earnings is compensation of subsidy from government
and upstream. High share in subsidy is thus one of the risks. The other risk is
large inventory loss due to steep decline in oil price. In FY09 R&M companies had
their lowest earnings due to inventory loss despite not having to bear any subsidy.
Expect investors to look at the glass as half full
R&M companies’ earnings are difficult to predict but this may also mean positive
surprise like in FY10-FY11. There was unexpectedly higher compensation from
upstream in FY11 and from government in FY10. Even in case of large inventory
loss due to oil price collapse investors may focus on the better outlook for FY13.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Petro.
Best play on reforms among
R&M companies
„Raise PO by 13% to Rs500 to reflect likely re-rating; Buy
The government on June 24 hiked fuel prices and cut taxes to cut subsidy by over
US$10bn. However, there is no clarity on subsidy sharing. It is therefore difficult to
estimate the gains from subsidy cut especially to R&M companies. Therefore
changes in HPCL’s FY12-FY13 EPS are modest. However, the good news is that
diesel would be deregulated if oil price declines by another 11%. We expect
investors to be enthused by this possibility and re-rate HPCL. To reflect the likely
re-rating we have raised PE multiple used to value HPCL to 9x from 8x earlier.
This has meant 13% upgrade in its PO to Rs500 (implies 27% potential upside).
HPCL is our top pick among R&M companies as it is the cheapest on P/BV at
1.0x FY12. In our view, it also has good leverage to reforms. We retain Buy. .
R&M companies high risk-high return play on reforms
R&M companies’ stock price reacts more positively to reforms than upstream.
R&M company stocks were up far more than upstream peers after the fuel price
hikes made in June 2010 with HPCL being the best performer.
Risks to R&M: high share in subsidy & large inventory loss
The main driver of R&M earnings is compensation of subsidy from government
and upstream. High share in subsidy is thus one of the risks. The other risk is
large inventory loss due to steep decline in oil price. In FY09 R&M companies had
their lowest earnings due to inventory loss despite not having to bear any subsidy.
Expect investors to look at the glass as half full
R&M companies’ earnings are difficult to predict but this may also mean positive
surprise like in FY10-FY11. There was unexpectedly higher compensation from
upstream in FY11 and from government in FY10. Even in case of large inventory
loss due to oil price collapse investors may focus on the better outlook for FY13.
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