HINDUSTAN PETROLEUM CORPOR. Muted outlook: Edelweiss

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􀂄 Throughput at 3.0 mmt; Q2FY11 blended GRM at USD 2.7/bbl
Hindustan Petroleum Corporation (HPCL) reported refining throughput at 3.0 mmt
in Q2FY11, which eased 7.6% Q-o-Q and 24.2% Y-o-Y. Mumbai refinery’s
throughput, at 1.5 mmt, jumped 24.4% Q-o-Q, but decreased 14.3% Y-o-Y, while
that of the Vizag refinery was down 32.2% Y-o-Y and 26.7% Q-o-Q, at 1.5 mmt
(due to maintenance shutdown of a CDU). Quarterly blended GRMs, at USD
2.7/bbl (down 27.4% Q-o-Q, up 49.3% Y-o-Y), were lower than our estimate of
USD 3.3/bbl. Blended GRMs for H1FY11 stood at USD 3.2/bbl, down 18.1% Y-o-Y.


􀂄 Subsidy sharing by GoI leads to over-recovery; marketing sales lower
HPCL’s marketing gross under-recoveries for the quarter were at INR 24.2 bn.
Government provided a subsidy of INR 28.3 bn as partial compensation for
H1FY11, while it also received upstream discounts of INR 8.1 bn from ONGC and
GAIL (equal to 33.3% of gross under-recoveries in Q2FY11). The company, thus,
had net over-recovery of INR 12.2 bn in Q2FY11, with the cumulative net underrecovery
in H1FY11 at INR 17.2 bn.

With the provision of government subsidy,
HPCL reported PAT of INR 20.9 bn for Q2FY11. This compares with a loss of INR
18.8 bn in Q1FY11 and INR 1.4 bn in Q2FY10 due to zero subsidy sharing by GoI.
Domestic marketing sales for Q2FY11, at 5.8 mmt, were up 3.4% Y-o-Y but dipped
10.3% Q-o-Q due to the impact of heavy monsoons. Export marketing sales at
170 TMT were also down 71.2% Y-o-Y and 15% Q-o-Q.

􀂄 Outlook and valuations: Bullish on crude; maintain ‘REDUCE’
Our muted outlook on HPCL continues based on our bullish stance on crude prices
and uncertainty regarding diesel de-regulation. HPCL cash flows till FY13 will be
used for lower ROI based projects (up gradation of Mumbai and Vizag refinery to
Euro IV) which will be an overhang on the stock. We are rolling forward our
valuations to March 2012 from March 2011 earlier and have revised our SOTP to
INR 434/share.

With the highest sensitivity (amongst OMCs) to earnings from
marketing, we believe that the company’s incremental earnings may get capped
due to a run up of crude prices, resulting in higher under-recoveries. We also
continue with our belief that diesel de-regulation may not happen in the near term
due to the upcoming assembly elections in certain key states. Hence, in the
uncertain environment, we maintain ‘REDUCE/Sector Underperformer’ on the
stock. At INR 452, HPCL is trading at 9.9x and 8.8x our FY11E and FY12E
EV/EBITDA, respectively.