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HPCL reported EBITDA loss of INR29.4b for 2QFY12 v/s our expectation of an EBITDA of INR12.6b, primarily due to (1)
nil government compensation v/s our estimate of INR32b, (2) GRM of USD1.9/bbl, much lower than our estimate of
USD6.8/bbl, led by the June 2011 duty cut impact on crude inventory, and (3) forex loss of INR10b. The company
reported a net loss of INR33.6b v/s a net profit of INR21b in 2QFY11 and loss of INR30.8b in 1QFY12.
Net under-recovery sharing at 67% in 2QFY12, 44% in 1HFY12; model 4% in FY12
 Of the gross under-recovery of INR47b in 2QFY12, HPCL received INR15.6b from upstream as discounts on crude
purchases. However, the government did not pay any compensation during the quarter. The net subsidy burden was
INR31.2b in 2QFY12.
 For FY12, we model upstream share at 38.7%, government share at ~57% and OMCs' share at 4%. For FY13, we
model OMCs' share at 13%.
June 2011 duty cuts impact GRM
 GRM for the quarter was USD1.9/bbl (v/s our estimate of USD6.8/bbl) as against USD2.7/bbl in 2QFY11 and USD1.1/
bbl in 1QFY12. The lower than expected GRM was led by duty cuts effected by the government in June 2011, which
impacted HPCL's crude inventory.
 We estimate the impact of duty cut on the 2QFY12 reported GRM at ~USD1.2/bbl. Further, the large underperformance
v/s the regional benchmark Reuters Singapore GRM in recent quarters is due to the difference in product slate -
HPCL is a diesel-heavy refiner and cracks of diesel were down QoQ in 2QFY12.
Valuation and view
 We model Brent oil price of USD110/95/90/85/bbl in FY12/FY13/FY14/long-term in our estimates. Similar to earlier
years, government subsidy sharing is likely to be finalized towards the end of the year. In view of the likely ONGC
FPO, we expect the government to spell out a sustainable subsidy-sharing formula.
 To account for lower GRM performance in 2QFY12, we cut our FY12E EPS by 19% to INR30.6. The stock trades at
10.9x FY12E EPS of INR30.6 and 0.9x FY12E BV. Key things to watch (apart from subsidy sharing) are the start of
commercial production at Bhatinda Refinery at full utilization and GRM performance. Valuations are reasonable.
Maintain Buy.
Reports loss due to nil government sharing, forex loss and lower GRM
 HPCL reported EBITDA loss of INR29.4b for 2QFY12 v/s our expectation of an
EBITDA of INR12.6b, primarily due to (1) nil government compensation v/s our
estimate of INR32b, (2) GRM of USD1.9/bbl, much lower than our estimate of USD6.8/
bbl, led by the June 2011 duty cut impact on crude inventory, and (3) forex loss of
INR10b.
 The company reported a net loss of INR33.6b v/s a net profit of INR21b in 2QFY11
and loss of INR30.8b in 1QFY12.
 Given the ad-hoc subsidy sharing, we believe quarterly financials are not indicative of
the likely full-year performance. We now model OMCs' subsidy sharing at 4% in
FY12 (v/s 8.8% in FY11) and upstream sharing at ~39%. The rest would be borne by
the government.
Other key highlights
 Product inventory adventitious gain in the quarter was INR8.7b v/s gain of INR3b in
2QFY11 and INR2.2b in 1QFY12.
 Refinery throughput stood at 4.2mmt (v/s our estimate of 4.3mmt), up 38% YoY and
5% QoQ. Marketing volumes were 5% lower QoQ at 6.9mmt, led by seasonal factors.
 Gross debt stood at INR312b as at September 2011 v/s INR250b as at March 2011.
Despite sharp rise in debt levels, HPCL's interest cost was largely contained (INR3b
v/s INR2.6b in 1QFY12) due to lower interest rate at ~4.5%.
 HPCL is in the process of commissioning the CDU at its new Bhatinda Refinery and
expects to start commercial production by 4QFY12.



Company description
A Fortune-500 company, HPCL is a refining and marketing
company in India and also has interests in upstream. It owns
13.5mmt of refining capacity, split across Mumbai (6.5mmt)
and Vishakapatnam (7.5mmt). It has a crude and product
pipeline network of ~2,100km and sells ~26mmt of petroleum
products. HPCL also holds a 16.9% stake in MRPL, a
standalone refiner, which it jointly promoted. MRPL is now
a subsidiary of ONGC. HPCL is a state-owned company,
with 51.11% Government of India (GoI) stake.
Key investment arguments
 HPCL's profitability continues to be determined by the
quantum of under-recoveries and sharing mechanism,
rather than fundamentals.
 Medium to long-term growth would come from its
9mmtpa grassroots refinery being set up in JV (~50%
stake) with Mittal Energy Investments, with an estimated
capex of INR172b.
 Post deregulation and subsidy rationalization, HPCL's
valuations should benefit due to improvements in (1)
earnings quality, (2) RoCE and RoE, (3) cash cycle,
and (4) debt levels.


Valuation and view
 We model Brent oil price of USD110/95/90/85/bbl in FY12/FY13/FY14/long-term in
our estimates. Similar to earlier years, government subsidy sharing is likely to be finalized
towards the end of the year. Led by delay in government compensation, we continue
to model higher debt levels (leading to higher interest costs) for the next two quarters
and expect bulk of the government compensation to come in 4QFY12. In view of the
likely ONGC FPO, we expect the government to spell out a sustainable subsidysharing
formula.
 To account for lower GRM performance in 2QFY12, we cut our FY12E EPS by 19%
to INR30.6. The stock trades at 10.9x FY12E EPS of INR30.6 and 0.9x FY12E BV.
Key things to watch (apart from subsidy sharing) are the start of commercial production
at Bhatinda Refinery at full utilization and GRM performance. Valuations are reasonable.
Maintain Buy.