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1QFY12 results
HPCL’s 1QFY12 net loss of Rs30.8bn was larger than our estimate. Weak
core GRMs, a large inventory write-down in refining segment, lower than
expected product inventory gains and large loss on petrol sales were the
key drags. While decline in crude prices will help the macro for all state
owned oil & gas stocks, we continue to prefer the upstream SOEs; the
R&Ms have larger EPS sensitivity to a change in subsidy sharing formula
while large crude price corrections may also predicate inventory losses.
Given its single digit return ratios, HPCL’s 1x PB is unattractive. U-PF.
1QFY12 PAT came lower than our estimate
HPCL’s 1QFY12 net loss of Rs30.8bn was larger than our estimate. Lower than
expected core GRMs (US$2.3 cf. US$6.9/bbl), a large inventory writedown
(US$1.5/bbl impact on GRMs, Rs1.6bn), smaller than expected product
inventory gain (Rs2.2bn) and loss on petrol sales of Rs6bn weighed on
performance. MTM losses on bonds and one time provision on revision of nonmanagerial
salaries of Rs0.7bn further added to already large losses.
Fall in crude to lower under-recovery but inventory losses will rise
Driven by rise in concerns around global growth and in turn oil demand, crude
prices have corrected by +10% in Aug-11. While this improves the macro for
all SOEs in India by cutting under-recoveries, refiners like HPCL would also be
impacted by a rise in inventory losses. We continue to prefer upstream
stocks, therefore, over the downstream SOEs as a play on this theme.
Uncertainty on subsidy framework is a headwind
While upstream sharing reverted to one-third in 1QFY12 from 39% in FY11,
lower government support at 34.5% dragged HPCL into losses. We model
government’s share at 55% for FY12 (downstream 11.7%) but note that this
framework will be uncertain till May-12. With a 1ppt change impacting FY12
EPS by 8%, HPCL’s FY12 EPS will be indeterminable for another nine months.
Maintain U-PF; prefer upstream over downstream
As high capex will keep HPCL FCF negative and pressure return ratios even in
a benign subsidy scenario, its 1x FY12 PB appears unattractive. Nonetheless,
decline in crude prices, possibility of a cap on subsidised LPG volumes or
newsflow around likelihood of formalisation of a subsidy sharing formula may
benefit all state owned oil & gas stocks. However, we would prefer to play
these through upstream names because of their higher historical stability and
lower earnings sensitivity to a change in the subsidy formula. Maintain U-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1QFY12 results
HPCL’s 1QFY12 net loss of Rs30.8bn was larger than our estimate. Weak
core GRMs, a large inventory write-down in refining segment, lower than
expected product inventory gains and large loss on petrol sales were the
key drags. While decline in crude prices will help the macro for all state
owned oil & gas stocks, we continue to prefer the upstream SOEs; the
R&Ms have larger EPS sensitivity to a change in subsidy sharing formula
while large crude price corrections may also predicate inventory losses.
Given its single digit return ratios, HPCL’s 1x PB is unattractive. U-PF.
1QFY12 PAT came lower than our estimate
HPCL’s 1QFY12 net loss of Rs30.8bn was larger than our estimate. Lower than
expected core GRMs (US$2.3 cf. US$6.9/bbl), a large inventory writedown
(US$1.5/bbl impact on GRMs, Rs1.6bn), smaller than expected product
inventory gain (Rs2.2bn) and loss on petrol sales of Rs6bn weighed on
performance. MTM losses on bonds and one time provision on revision of nonmanagerial
salaries of Rs0.7bn further added to already large losses.
Fall in crude to lower under-recovery but inventory losses will rise
Driven by rise in concerns around global growth and in turn oil demand, crude
prices have corrected by +10% in Aug-11. While this improves the macro for
all SOEs in India by cutting under-recoveries, refiners like HPCL would also be
impacted by a rise in inventory losses. We continue to prefer upstream
stocks, therefore, over the downstream SOEs as a play on this theme.
Uncertainty on subsidy framework is a headwind
While upstream sharing reverted to one-third in 1QFY12 from 39% in FY11,
lower government support at 34.5% dragged HPCL into losses. We model
government’s share at 55% for FY12 (downstream 11.7%) but note that this
framework will be uncertain till May-12. With a 1ppt change impacting FY12
EPS by 8%, HPCL’s FY12 EPS will be indeterminable for another nine months.
Maintain U-PF; prefer upstream over downstream
As high capex will keep HPCL FCF negative and pressure return ratios even in
a benign subsidy scenario, its 1x FY12 PB appears unattractive. Nonetheless,
decline in crude prices, possibility of a cap on subsidised LPG volumes or
newsflow around likelihood of formalisation of a subsidy sharing formula may
benefit all state owned oil & gas stocks. However, we would prefer to play
these through upstream names because of their higher historical stability and
lower earnings sensitivity to a change in the subsidy formula. Maintain U-PF.
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