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Hindustan Petroleum
Subsidy and low GRMs hurt earnings
Event
ƒ HPCL announced a 1Q FY12 net loss of Rs30.8bn, which, when adjusted for
the limited subsidy reimbursement by the Govt, was ~18% lower than our
estimates due to low GRMs and throughput. 1Q earnings for oil marketing
companies (OMC) are typically the worst (especially during high crude prices
regimes) due to large subsidy payouts being delayed by the Government; but
are not representative of earnings potential as subsidy gets finalized on adhoc basis at the year-end. We maintain OP with a TP of Rs507, and
recommend it as a cheap (0.9x FY12E P/BV) countercyclical in volatile,
bearish market conditions.
Impact
ƒ GRMs at US$1.09/bbl, down 87% QoQ; refinery volumes down 8% QoQ:
Throughput was down due to a major shutdown in the Mumbai refinery.
Despite high product cracks (>US$ 15/bbl for gasoline and middle distillates
Diesel and Jet-Kerosene), GRMs fell sharply due to crude inventory losses in
the Vizag refinery which contributed most of the throughput for the quarter.
ƒ Upstream shared 33%, Govt 35%; Net losses of Rs31bn for 1Q FY12: The
Government allocated Rs33bn cash to HPCL (Rs150bn total to OMCs), while
upstream sharing reverted to the usual metric of 33% (from 38% in 4Q FY11);
hence HPCL had net losses of Rs31bn for 1Q FY12. We expect OMCs to
share ~Rs80bn (7% of under-recoveries) in FY12 (Rs17bn by HPCL).
ƒ Subsidy reduction to US$18bn possible through multiple drivers: The
increase in retail prices of petro products and duty cuts on auto-fuels and
crude in July had reduced FY12E under-recoveries by ~30% to US$26bn.
Recent sharp fall in crude prices by ~11% (see Fig 10) has slashed diesel
under-recoveries to almost nil, while gasoline has entered over-recovery (see
Fig 7). At the current run rate, FY12 under-recovery could fall to ~US$ 18bn.
ƒ Intensification on proposals for structural shift away from subsidy:
Political consensus is being built around reducing the quantum (through
limiting subsidised cylinders per household to 4-6/yr) and ambit (through
targeting them at only income groups above Rs0.6m/yr) of LPG subsidy, and
moving to cash-based subsidy transfer, possibly by 2012 itself. Dual-pricing of
diesel is another proposal to curtail subsidy being used by passenger cars. All
these measures should alleviate the burden on OMCs and reduce linked
working capital.
Earnings and target price revision
ƒ FY13E PAT cut by ~2%. TP maintained at Rs507.
Price catalyst
ƒ 12-month price target: Rs507.00 based on a Sum of Parts methodology.
ƒ Catalyst: Further fall in crude, clarity in subsidy sharing, Bhatinda refinery
commissioning (expected in November 2011) and ramp-up
Action and recommendation
ƒ We continue to believe OMCs offer a safer haven in falling markets. With
global macro-uncertainties looming large and crude prices cooling on the back
of that, OMCs provide an Indian domestic consumption-linked investment
avenue which is inversely correlated to falling markets and crude.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Petroleum
Subsidy and low GRMs hurt earnings
Event
ƒ HPCL announced a 1Q FY12 net loss of Rs30.8bn, which, when adjusted for
the limited subsidy reimbursement by the Govt, was ~18% lower than our
estimates due to low GRMs and throughput. 1Q earnings for oil marketing
companies (OMC) are typically the worst (especially during high crude prices
regimes) due to large subsidy payouts being delayed by the Government; but
are not representative of earnings potential as subsidy gets finalized on adhoc basis at the year-end. We maintain OP with a TP of Rs507, and
recommend it as a cheap (0.9x FY12E P/BV) countercyclical in volatile,
bearish market conditions.
Impact
ƒ GRMs at US$1.09/bbl, down 87% QoQ; refinery volumes down 8% QoQ:
Throughput was down due to a major shutdown in the Mumbai refinery.
Despite high product cracks (>US$ 15/bbl for gasoline and middle distillates
Diesel and Jet-Kerosene), GRMs fell sharply due to crude inventory losses in
the Vizag refinery which contributed most of the throughput for the quarter.
ƒ Upstream shared 33%, Govt 35%; Net losses of Rs31bn for 1Q FY12: The
Government allocated Rs33bn cash to HPCL (Rs150bn total to OMCs), while
upstream sharing reverted to the usual metric of 33% (from 38% in 4Q FY11);
hence HPCL had net losses of Rs31bn for 1Q FY12. We expect OMCs to
share ~Rs80bn (7% of under-recoveries) in FY12 (Rs17bn by HPCL).
ƒ Subsidy reduction to US$18bn possible through multiple drivers: The
increase in retail prices of petro products and duty cuts on auto-fuels and
crude in July had reduced FY12E under-recoveries by ~30% to US$26bn.
Recent sharp fall in crude prices by ~11% (see Fig 10) has slashed diesel
under-recoveries to almost nil, while gasoline has entered over-recovery (see
Fig 7). At the current run rate, FY12 under-recovery could fall to ~US$ 18bn.
ƒ Intensification on proposals for structural shift away from subsidy:
Political consensus is being built around reducing the quantum (through
limiting subsidised cylinders per household to 4-6/yr) and ambit (through
targeting them at only income groups above Rs0.6m/yr) of LPG subsidy, and
moving to cash-based subsidy transfer, possibly by 2012 itself. Dual-pricing of
diesel is another proposal to curtail subsidy being used by passenger cars. All
these measures should alleviate the burden on OMCs and reduce linked
working capital.
Earnings and target price revision
ƒ FY13E PAT cut by ~2%. TP maintained at Rs507.
Price catalyst
ƒ 12-month price target: Rs507.00 based on a Sum of Parts methodology.
ƒ Catalyst: Further fall in crude, clarity in subsidy sharing, Bhatinda refinery
commissioning (expected in November 2011) and ramp-up
Action and recommendation
ƒ We continue to believe OMCs offer a safer haven in falling markets. With
global macro-uncertainties looming large and crude prices cooling on the back
of that, OMCs provide an Indian domestic consumption-linked investment
avenue which is inversely correlated to falling markets and crude.
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