HPCL • •Higher GRMs, inventory gains and government support turn Q3 bottom-line black :: Centrum

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Higher GRMs, inventory gains and government
support turn Q3 bottom-line black
HPCL reported Rs27.3bn PAT surprising our and street estimates on the back
of additional compensation from government (total support of Rs450bn for
9MFY12). The company received Rs65.8bn compensation from the
government for the under-recoveries incurred during Q2 and Q3.
Additionally, the company also benefitted from product inventory gains
(Rs2.5bn). It was a good quarter operationally with average GRMs at
US$4.8/bbl for its refineries and crude throughput at 7.5mmt.
􀂁 Revenue jump due to higher product sales: HPCL reported 41.1% YoY and
29.5% QoQ jump in revenues at Rs480.5bn backed by higher product sales
and high crude prices. Throughput during the quarter remained flattish at
4.1mmt while market sales jumped to 7.5mmt against 7.1mmt in Q3FY11 and
6.9mmt in Q2FY12.
􀂁 Higher than expected support from the government leads to profits: The
government approved Rs450bn compensation for OMCs for under-recoveries
incurred during 9MFY12 (of which Rs300bn was accounted for in Q3FY12).
Thus, HPCL accounted for Rs65.8bn compensation from the government in its
reported numbers which led to profits for the company. Refiners with lower
complexity gained during the quarter due to expansion in Naphtha-Crude and
Fuel Oil-Crude cracks, thus HPCL also benefitted from this and reported strong
GRMs of US$4.8/bbl in Q3. Also, the company had product inventory gains of
about Rs2.5bn which benefitted profitability.
􀂁 PAT for Q3, yet losses for 9MFY12: HPCL reported under-recoveries of
Rs71.2bn during Q3. The company received Rs33.5bn subsidies from upstream
companies while Rs65.8bn was government compensation. The
compensation for Q3 was higher at Rs99.3bn due to partial compensation for
Q2. hence , the company was able to report PAT of Rs27.2bn. Yet for 9MFY12
the company reported loss of Rs37.2bn.
􀂁 Cheap valuations, government support to aid profitability: Although,
HPCL reported loss for 9MFY12, the government will make sure the company
reports profits for FY12E. Upcoming Bhatinda refinery would support earnings
for the company from FY13 onwards. Valuations for the stock look relatively
cheap at 0.8x FY13E core book value. Hence, we maintain ‘Buy’ on the stock.
We have arrived at SOTP valuation of Rs402 based on 1.0x core book value of
Rs356 and investments in MRPL, Oil India valued at 30% discount to the
market price.