Performance beats estimates… • HPCL :: ICICI Securities, link

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Sizzling Stocks: Shree Cement (Rs 2,924.5); HPCL (Rs 334.3) :Business Line

Shree Cement (Rs 2,924.5)

The stock jumped up almost 8 per cent with above average volumes on Friday, pushing its weekly gains to 10.4 per cent. Following a corrective decline from its all-time high of Rs 3,279, registered in early April 2012, the stock found support at Rs 2,270 during early June. Triggered by positive divergence in the daily relative strength index, the stock reversed direction and began to move higher. Since then it has been on a short-term uptrend. This upward journey appears to have resumed its long-term uptrend that has been in place from 2008 low of Rs 330. Intermediate-term trend is also up since September 2011 low of Rs 1,570. Both the daily and the weekly RSI are featuring in the bullish zone.

The stock can continue its upward momentum and test resistance at Rs 3,000 in the short-term and Rs 3,300 in the medium-term. Strong breakthrough of Rs 3,300 can push the stock higher to Rs 3,500. Conversely, inability to rally above Rs 3,300 can pull the stock down to Rs 2,700 or to Rs 2,400 in the same period. Next important support is at Rs 2,100.

Oil Refining & Marketing - Sing GRM at 15-week low; RIL up US$1/bbl WoW but weak 􀂄 :: BofA Merrill Lynch

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Oil Refining & Marketing
Sing GRM at 15-week low; RIL
up US$1/bbl WoW but weak
􀂄 Singapore GRM halved over last seven weeks to US$5.1/bbl
Reuters’ Singapore GRM has fallen by 51% since the week ended January 27
from US$10.3/bbl to US$5.1/bbl last week. Singapore GRM last week is at the
lowest level in 15 weeks. Singapore GRM in 4QTD is now at US$8.0/bbl. It has
been hit by a fall in diesel, jet fuel and fuel oil cracks. Fuel oil cracks have
declined the most (US$10.7/bbl) in the last seven weeks. Jet fuel and diesel
cracks are also down from peak levels in 4Q by US$3.7-5.0/bbl to US$13.7-
13.9/bbl. In the last 2-3 weeks diesel and jet fuel cracks are at the lowest level
since Nov-Dec’10.
RIL’s theoretical GRM up US$1.0/bbl WoW at US$4.5-5.7/bbl
RIL’s theoretical GRM last week at US$4.5-5.7/bbl is up US$1.0/bbl WoW with
higher end of the estimate being at US$0.6/bbl premium to Singapore GRM. RIL
has gained from Arab heavy being at US$0.4/bbl discount to Dubai and not
producing fuel oil (cracks down sharply). However, RIL’s GRM was boosted most
by our assumption that its new refinery uses Souedie crude (API of 24), which
was at US$6.3/bbl discount to Dubai. If use of Oriente crude (also API of 24) is
assumed, RIL’s GRM last week would be lower at US$3.6-4.7/bbl.
RIL’s theoretical GRM in Mar’12 lowest since Dec’09
RIL’s theoretical GRM to date in March 2012 at US$3.9-5.0/bbl is at the lowest
level since December 2009.
RIL’s 4QTD GRM below Singapore GRM and down YoY
RIL’s theoretical GRM in 4QTD at US$5.3-6.5/bbl is down US$2.7-3.9/bbl YoY
(US$9.2/bbl in 4Q FY11). It is also US$1.5-2.7/bbl below Reuters’ Singapore
GRM of US$8.0/bbl. RIL’s gain from QoQ product cracks rise is less than that of
Reuters’ product slate. Discount to Dubai of crude RIL uses is also QoQ lower.
RIL’s 4Q profit down 20-30% YoY at 4QTD GRM
RIL’s 4Q profit works out to Rs37.4-43.1bn at 4QTD theoretical GRM of US$5.3-
6.5/bbl and blended petrochemical margin of US$427/t (down 22% YoY in rupee
terms). It would mean 20-30% YoY fall in 4Q profit (4Q FY11: Rs53.8bn).
Downside to RIL’s FY13 EPS 10-20% if GRM at 4QTD level
Our FY13 EPS estimate for RIL assumes its GRM at US$8/bbl. If RIL’s FY13
GRM is at 4QTD FY12 level (ignoring shutdown) of US$5.7-6.8/bbl, its FY13 EPS
would be 10-20% below our estimate of Rs66.9.
R&M companies GRM up WoW and QoQ
BPCL and HPCL’s theoretical GRM last week was up WoW at US$3.1-3.
2/bbl. Their 4QTD theoretical GRM (including inventory gain) is also up QoQ at
US$5.8-5.9/bbl.

Buy Hindustan Petroleum Corporation (HPCL) Target : Rs 368 ::ICICI Securities

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http://content.icicidirect.com/mailimages/ICICIdirect_HPCL_Q3FY12.pdf


B a c k   i n   t h e   b l a c k … .
Hindustan Petroleum Corporation (HPCL) declared its Q3FY12 results with
revenues at | 48047.5 crore, EBITDA at | 3702.6 crore and PAT at
| 2725.2 crore. The results were above our estimates mainly on account
of additional budgetary support from the government (total
compensation of | 45000 crore for 9MFY12) and higher upstream share at
47.1% of gross under-recoveries. HPCL had a net over recovery of
| 2805.7 crore during Q3FY12. We expect gross under-recoveries at
~| 1,39,534 crore and ~| 1,28,672 crore in FY12E and FY13E,
respectively. We believe the government will make sure that the OMCs
report profits for FY12E. Hence, we have assumed net under-recoveries
for downstream companies at 6% in FY12E. We estimate HPCL will report
EPS of | 12.9 and | 38.7 in FY12E and FY13E, respectively. We
recommend a BUY rating on the stock with a price target of | 368.

ƒ Highlights of the quarter
The crude oil throughput remained flat on a YoY basis at 4.1 MMT
whereas total sales increased 5.6% YoY and 8.7% QoQ to 7.5 MMT.
The gross refining margins (GRMs) at US$ 4.8 per barrel in Q3FY12
were higher than our estimate of US$4.0 per barrel on account of
inventory gain. Interest costs grew 188.9% on a YoY basis due to a
delay in government compensation towards under-recovery, which
led to an increase in working capital loans.
V a l u a t i o n
HPCL is trading at 22.3x FY12E and 7.5x FY13E EPS of | 12.9 and | 38.7,
respectively. We recommend a BUY rating on the stock with a price target
of | 368 (valuation based on average of P/BV multiple: | 333 per share
and P/E multiple: | 403 per share).

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.

BUY Hindustan Petroleum (HPCL) -Potentially limited impact of the possible production cuts; Goldman Sachs

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Hindustan Petroleum (HPCL.BO) Rs264.20
Equity Research
Potentially limited impact of the possible production cuts; CL-Buy
News
The Times of India has reported that the Pollution Control Board (PCB) has
imposed a 30% cut in production (during winter season) at HPCL’s Vizag
refinery on account of its failure to adhere to emission norms. It further
states that HPCL has clarified that it has not violated any norms.
Analysis
In the event of production being cut by 30% at the Vizag refinery during the
winter season, HPCL’s crude throughput would be reduced by about one
mtpa or 6% lower than our estimates. In our view, the impact on the FY12E
earnings would be about negative 3% if HPCL maintains the market sales
volume at similar levels that it would achieve without the production cut. In
case the market sales volume goes down by one mtpa as well, we estimate
the negative impact on FY12E earnings would be about 5%.
Implications
Although Indian inflation is high at about 9.1%, GS economists expect it to
fall to about 7% by Mar 2012. Falling inflation combined with lower than
targeted disinvestment collections for FY12 (Rs11bn vs 400bn target) would
make it likely that the Indian government would increase fuel prices going
into CY12. In our view, the government would likely go ahead with fuel
price increases in early CY2012 to lower its cash subsidy payout and thus
the fiscal deficit (GS estimates at 5.8% for FY12E vs. govt. target of 4.6%).
We maintain our Buy rating (Conviction List) on HPCL. We believe it would
benefit the most relative to its peers from any regulatory action leading to
higher retail fuel prices. It has the highest sales/refining volume ratio
among the OMCs (FY12E:1.6x). Our 12-m EV/EBITDA-based TP of Rs484
implies 84% upside. HPCL is trading at 1-yr forward price/book of 0.63x,
near its 10-yr historical low price/book multiple of 0.54x. Key risks: global
oil price spike, rise in inflation and weak INR-USD rate.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutral

Buy HPCL:: Motilal oswal,

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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.

Hindustan Petroleum: Weak results :: Kotak Sec

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Hindustan Petroleum (HPCL)
Energy
Weak results. HPCL reported 2QFY12 net loss at `33.6 bn versus net loss of `30.8 bn
in 1QFY12; our estimate was net loss of `34.5 bn. The qoq decline despite (1) adventitious
gains of `8.7 bn and (2) higher refining margins (+US$0.8/bbl qoq) reflects likely large
foreign exchange loss of ~`10 bn. We maintain our ADD rating on HPCL given 15%
potential upside to our revised target price of `385 (`430 previously).

Buy HPCL; Target : Rs 465 ::ICICI Securities

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L o w e r   r e f i n i n g   m a r g i n s   d r a g   b o t t o m l i n e …
Hindustan Petroleum Corporation (HPCL) declared its Q2FY12 results with
revenues of | 37104.2 crore, EBITDA loss of | 2869.7 crore and net loss of
| 3364.5 crore. The results were below our estimates mainly on account
of a sharp drop in refining margins and higher net under-recoveries. The
downstream companies shared a net  subsidy burden of 66.67% (|
14248.5 crore) in Q2FY12. Changes in the customs duty structure in June
end led to a sharp decline in the refining margin to US$1.9/barrel in
Q2FY12. The interest cost stood at | 302.8 crore in Q2FY12 increasing
significantly by 37.6% YoY. We have maintained our Brent crude oil
prices estimates of US$100/barrel,  going forward. We expect gross
under-recoveries at ~| 1,10,950 crore and ~| 83,500 crore in FY12E and
FY13E, respectively. We assume net  under-recoveries for downstream
companies at 8.8% in FY12E and FY13E. We estimate HPCL will report
EPS of | 32.4 and | 52.2, respectively, in FY12E and FY13E. We
recommend a BUY rating on the stock with a price target of | 465.
ƒ Highlights of the quarter
The crude oil throughput increased 40% YoY from 3.0 MMT in
Q2FY11 to 4.2 MMT in Q2FY12 due to higher capacity utilisation
from both Mumbai and Vishakhapatnam refinery. Gross refining
margins (GRMs) dropped significantly from US$2.7/barrel in Q2FY11
to US$1.9/barrel in Q2FY12 due to changes in the customs duty
structure in June end. Total market sales increased 15% YoY from
6.0 MMT in Q2FY11 to 6.9 MMT in Q2FY12. The net subsidy burden
for downstream companies in this quarter is 66.67% in Q2FY12,
which led to net under-recoveries of | 3125 crore in Q2FY12.
V a l u a t i o n
HPCL is trading at 10.3x FY12E and 6.4x FY13E EPS of | 32.4 and | 52.2,
respectively. We recommend a BUY rating on the stock with a price target
of | 465 (valuation based on average of P/BV multiple: | 427/share and
P/E multiple: | 502/share).

HPCL Result below estimates BUY :Emkay,

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HPCL

Result below estimates

BUY

CMP: Rs 337                                       Target Price: Rs 463

---

n     HPCL reported results which were below our estimates with EBIDTA loss at Rs.26.8bn and Net loss at Rs.33.6bn, revenue grew by 20.2% to Rs.371bn

n     Direct market sales grew by 15% YoY to 6.94mmt, while crude throughput increased by 37.8% YoY to 4.2mmt

n     Average gross refining margin for Q2 FY12 was at $1.9/bbl as compared to $2.7/bbl, declined by 27.5% YoY, however GRM grew by 76.8% sequentially

n     Valuations look attractive at 0.7x FY13E ABV, continue BUY rating with TP of Rs.463

HPCL • •TOP Muhurat 2011 PICK ::ICICI Securities,

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HPCL
• Hindustan Petroleum Corporation (HPCL), a Fortune 500
company, is engaged in refining and marketing of petroleum
products in India. It operates two refineries with 16.3 mmtpa
capacity in FY11 and has ~18% share in marketing of petroleum
products. HPCL, in a joint venture with Mittal Energy, is setting
up a 9 mmtpa refinery at Bhatinda, which would be operational
in FY12E
• We believe capacity expansion, increase in retail sales volume
and higher refining margins would create value for investors,
going forward. Also, government policy and reforms in the
pricing of sensitive petroleum products could reduce net underrecoveries of the company. We have assumed Brent crude oil
prices of US$100 per barrel and  net under-recoveries of 8.8%
for OMCs in FY13E
• HPCL is trading at 7.5x FY12E and 6.3x FY13E EPS of | 46.1 and
| 55.2. HPCL’s book value of  | 439 in FY13E also offers good
risk reward ratio to long-term investors. Sustained higher crude
oil prices and adverse government policy remain risks to our
recommendation

find detail report and other stock pick detail at

Muhurat 2011: Selective stock picking in turbulent times…::ICICI Securities,

Buy Hindustan Petroleum (HPCL.BO):: Research Tactical Idea ::Morgan Stanley Research,

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Hindustan Petroleum (HPCL.BO)

Research Tactical Idea
We believe the share price will rise relative to the country index over the next 30 days.
Oil Marketing Companies (OMCs) today announced a hike in retail gasoline prices of 4.9% , the second in the last four
months, taking the cumulative hike to 34% since June 2010, when gasoline was decontrolled. This is more in sync with the
crude oil price increase of 48% during the same time. We view today's move as a key positive for OMCs, as this proves
that the price decontrol for gasoline is now real.
We estimate that there is about a 70% to 80% or "very likely" probability for the scenario.
Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the
scenario.
Stock Rating: Overweight
Industry View: Attractive

HPCL::Takeaways Motilal Oswal Annual Global Investor Conferences

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Key Takeaways
Hopeful on policy reforms to reduce under-recoveries
 The management indicated that it has the back-end ready for the government's
recently announced policy to limit the number of domestic LPG cylinders per household.
 However, it ruled out dual pricing in diesel due to practical difficulties in
implementation.
Bhatinda refinery commercial production likely by end-2011
 The management indicated that its new 9mmtpa Bhatinda refinery (JV with Mittal
Energy Investments, HPCL stake at 50%) with Nelson Complexity of 12+ is mechanically
complete and expects commercial production to commence by December 2011.
 The final capex of the refinery stands at ~INR190b. HPCL expects refining margins
to higher by ~USD6/bbl over the regional benchmark Singapore margins.
New greenfield refinery planned in Maharashtra
 HPCL is planning to set up a 9-18mmtpa greenfield refinery in Ratnagiri district in
Maharashtra.
 While it has already received some land allocation, the management indicated that
it will require additional land for the project.
To expand Visakh refinery to 15mmta (currently 8.5mmtpa)
 As against the earlier trend of annual capex of ~INR350b per year, HPCL is planning
to spend ~INR400b-450b per year in the next two years.
 It also plans to expand the Visakh refinery capacity from the current ~8.5mmtpa to
15mmtpa, with a capex of INR80b by FY15/16 (currently, detailed feasibility report
is being prepared).
 Some of the key ongoing/completed projects include:
- LOBS quality upgradation at Mumbai: Mechanically complete; estimated cost:
INR10.3b
- Single-point mooring at Visakh: Commissioned; total cost: INR6.4b
- New 1.45mmtpa FCCU at Mumbai: Mechanically complete; estimated cost: INR9b
- New diesel hydrotreater at Mumbai and Visakh: Targeting completion by
September 2011; estimated cost: INR70b
Valuation and view
 In the event of subsidy rationalization and decontrol of retail fuel prices, marketing
profits would improve and the stock could see a re-rating.
 The stock trades at attractive valuations of 9.6x FY12E EPS of INR39.3 and 1x FY12E
BV. Buy.

HPCL: 1QFY12 results ::CLSA

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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.

Buy HPCL; Target : Rs 472::ICICI Securities

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L o w e r   r e f i n i n g   m a r g i n s   d r a g   b o t t o m l i n e …
Hindustan Petroleum Corp (HPCL) declared its Q1FY12 results with
revenues of | 40916.9 crore, EBITDA loss of | 2568.4 crore and net loss of
| 3080.3 crore. The results were below our estimates mainly on account
of a sharp drop in refining margins and higher net under-recoveries. The
downstream companies shared a net subsidy burden of 32.3% (| 14088.6
crore) in Q1FY12. Lower inventory gain of | 218 crore and changes in
customs duty structure led to a sharp decline in the refining margins to
US$1.1 per barrel in Q1FY12. The interest cost stood at | 264.1 crore in
Q1FY12 increasing significantly by 34.2% YoY. We have maintained our
Brent crude oil prices estimates of US$100 per barrel, going forward. We
have assumed net under-recoveries for downstream companies at 8.8%
in FY12E and FY13E. We estimate HPCL will report EPS of | 41.2 and |
54.8 in FY12E and FY13E, respectively. We recommend a BUY rating on
the stock with a price target of | 472.

ƒ Highlights of the quarter
The crude oil throughput increased 20.7% YoY from 3.3 MMT in
Q1FY11 to 4.0 MMT in Q1FY12 on  account of higher capacity
utilisation from the both Mumbai and Visakh refinery. The gross
refining margins (GRMs) dropped significantly from US$3.7 per
barrel in Q1FY11 to US$1.1 per barrel in Q1FY12 on account of
lower inventory gain of | 218 crore and changes in customs duty
structure. The total market sales increased 8% YoY from 6.7 MMT in
Q1FY11 to 7.3 MMT in Q1FY12.  The net subsidy burden for
downstream companies in this quarter was 32.32% in Q1FY12,
which led to net under-recoveries of | 3060 crore in Q1FY12.
V a l u a t i o n
HPCL is trading at 9.2x FY12E and 6.9x FY13E EPS of | 41.2 and | 54.8,
respectively. We recommend the stock with a  BUY rating and a price
target of | 472 (valuation based on average of P/BV multiple: | 439 per
share and P/E multiple: | 505 per share).

Hindustan Petroleum – 1QFY12- GRMs disappoint ::RBS

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1QFY12 PAT was substantially below our subsidy adjusted estimates as reported GRMs were
much below our expectations. The company bore net retail under recoveries of 32.2% during the
quarter after accounting for GOI contribution.


􀀟 HPCL reported a loss of Rs26.9bn at EBITDA level in 1QFY12 compared to our subsidy
adjusted loss estimate of Rs13.4bn. The disappointment was primarily due to lower than
expected GRMs and higher staff costs even though this was partly offset by higher than
expected product inventory gains.
􀀟 Refining throughput of 3.97mt(+20.7%yoy, -8.1% qoq) was in line with our estimates. QoQ
throughput declined due to the scheduled refinery shutdowns.
􀀟 Like the other two OMCs, HPCL also reported sharp qoq decline in GRMs despite rise in
benchmark GRMs. 1QFY12 GRMs of $1.09/bbl (vs US$8.6/bbl in 4QFY11 and lowest in the
last six quarters) were substantially below our estimate of US$9.5/bbl. Note these GRMs
include crude inventory losses (not disclosed separately) which can significantly dampen the
true refining margins. On June 25 2011, government of India (GOI) removed the 5% customs
duty on crude while Brent was down 4.8% qoq in 1QFY12. To put into perspective, IOC
reported 1QFY12 GRMs of US$4.7/bbl after adjusting for crude inventory loss of US$2.35/bbl.
Consequently refining gross profits of Rs1.4bn was substantially below our estimate of
Rs12.4bn.
􀀟 Product inventory gains for HPCL during the quarter were Rs2.2bn compared to our estimate
of Rs800mn and Rs3.9bn in the immediately preceding quarter. OMCs continue to show
divergence in quarterly trends while reporting product inventory gains.
􀀟 During the quarter, HPCL has accounted for Rs32.7bn as GOI contribution towards gross
retail under recoveries which was disclosed some days back. The net under recoveries for
HPCL in 1QFY12 were Rs30.6bn or 32.2% share in gross under recoveries.
􀀟 The company reported net loss of Rs30.8bn in 1QFY12 vs our subsidy adjusted estimate of
Rs16.6bn reflecting the underperformance at EBITDA level.

Hindustan Petro. — In the red in 1Q; outlook much better from 2Q :: BofA Merrill Lynch,

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Hindustan Petro. — In the red in 1Q; outlook
much better from 2Q
Company Update
1Q in the red as R&M had to bear 32% of subsidy; Buy
Hindustan Petroleum (HPCL) is in the red in 1Q FY12 with loss at Rs30.8bn. In
1Q R&M companies like HPCL had to bear 32.2% of the subsidy with the
upstream (33.3%) and government (34.5%) contributing only 68%. In the last 3
years (FY09-FY11) R&M companies had borne 0-12% of the subsidy. We are
assuming that they will bear 8% of FY12 subsidy. R&M companies also had to
bear the entire subsidy on petrol in 1Q. We expect 2Q subsidy to be 45% lower
than in 1Q due to fuel price hike and tax cuts in end 1Q FY12. There is also
unlikely to be any subsidy on petrol from 2Q. Earnings outlook is thus likely to be
much better from 2Q. HPCL, which is trading at just 1x FY12 NAV, is our top pick
among R&M companies. We retain Buy on HPCL.
Refining margin down 71% YoY & inventory gain down 32%
HPCL’s 1Q loss rose 64% YoY at Rs30.8bn as its subsidy (including petrol) net of
compensation is up Rs7bn YoY. Also, HPCL’s 1Q FY12 GRM was 71% YoY lower
at US$1.1/bbl vis-à-vis US$3.7/bbl in 1Q FY11. HPCL was also hit by 32% YoY
lower inventory gain at Rs2.2bn in 1Q FY12 vis-à-vis Rs3.2bn in 1Q FY11.
However, crude throughput at 4.0mmt was 21% YoY higher.
Outlook much better from 2Q; FY12 EPS kept unchanged
We are assuming that R&M companies will have to bear 8% of FY12 subsidy
whereas they had to bear 32% of 1Q subsidy. HPCL’s 1Q FY12 loss would have
been 75% lower at Rs7.8bn if they had to bear 8% of 1Q subsidy. Subsidy will be
much lower in 2Q due to gains from cut in subsidy in end of 1Q. Earnings outlook
from 2Q is thus likely to be better. We have kept HPCL’s FY12 EPS forecast
unchanged at Rs45.2 (1% YoY decline).

Hindustan Petroleum (HPCL) Subsidy and low GRMs hurt earnings ::Macquarie Research,

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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.

HPCL- Cash compensation inadequate BUY :: Emkay

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HPCL

Cash compensation inadequate

BUY

CMP: Rs 384                                       Target Price: Rs 463

---

n     HPCL reported results which were above our estimates with EBIDTA loss at Rs.25.6bn and Net loss at Rs.30.8bn, revenue grew by 39.6% to Rs.409bn

n     Direct market sales grew by 8% to 7.27mmt, while crude throughput increased by 20.7% YoY to 3.97mmt

n     Average gross refining margin for Q1 FY12 was at $1.09/bbl as compared to $3.72/bbl, declined by 70.7% YoY and 87% sequentially

n     Valuations look attractive at 0.8x FY13E ABV, continue BUY rating with TP of Rs.463

UBS :: Asia Oil and Chemicals - Alpha Preferences 􀂄 Buy RIL;Sell HPCL

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UBS Investment Research
Asia Oil and Chemicals
A lpha Preferences
􀂄 Removing Sinopec from Most Preferred
Given Sinopec's 1.1x P/B (11E) valuation and downstream recovery potential in
2H11, the stock remains our top pick among China big 3 oil stock. However, we
are concentrating our China picks toward SinoTech Energy (CTE) as we expect
superior performance. We expect the Q3FY11 earnings result (4 August) coupled
with the companies US$20m share buy back will serve as catalysts.
􀂄 Removing PTT Chemical from Most Preferred
PTTCH stock has performed well lately, and we continue to like the stock for its
cheap valuation and favourable mid-term outlook. However, we expect stronger
performance from other stocks in the oil portfolio. Also, gas leak and lack of gas
feedstock may contribute to weaker profit QoQ for PTTCH in Q311.
􀂄 Removing CNOOC from Least Preferred
Following the decline in CNOOC, we are upgrading our rating from Neutral to
Buy. High market expectations coupled with production disruptions have led to
under-performance, in our view. This compares to Brent crude oil prices (up 26%
YTD), PetroChina (up 12% YTD) and Sinopec (up 4% YTD). We continue to
believe there is risk that CNOOC downgrades its 2011 production guidance.
However, we believe the risk has been well flagged by the market. Also the
resumption of full Bozhong complex production this week (39,000bpd) could mark
a turn in events. We also believe CNOOC is not likely to adjust its 5-year target of
6-10% CAGR. Since 2008, CNOOC has 47 discoveries (40 independent).


Reliance Industries (RELI.BO)
Buy
India
Chemicals
RIL’s Q1FY12 earnings at Rs56.6bn were ahead of UBS estimates but in line with
consensus. However EBITDA, at Rs99.3bn, was lower than our estimates, largely
on weaker petrochemical spreads and partly due to lower gas volumes. Overall,
operating numbers were a marginal miss. We reduce our FY12/FY13 earnings
estimates by 4%/2% respectively on weaker petchem segment. No change to our
expectation of a pickup in margins from Sept 2011 (Q3FY12) on seasonal demand
and soft landing of the Chinese economy. We believe concerns over gas production
as well as remarks by the Govt. auditors are overdone and as these get resolved,
there is upside to stock performance.
— Valuation: We value the commodity business i.e. refining and petrochemical at
7xFY13e EV/EBIDTA, within the Asian peer range of 6.6-10.5x.
— Risk: We base our Rs1150 price target on a sum-of-the-parts valuation. We
value the petchem/refining business at 7xFY13e EBIDTA and upstream on
NPV.


Least Preferred
Hindustan Petroleum (HPCL.BO)
Sell
India
Oil Companies, Secondary
Hindustan Petroleum’s (HPCL) existing refineries are low complexity and its new expansion
is delayed. As a result, while it looks attractive on a P/BV basis, it is expensive in terms of
EV/EBIDTA HPCL expects the Bhatinda refinery to be mechanically complete by May 2011.
However, based on our analysis of recent industry newsletters and the history of these types
of projects, we expect a substantial delay and assume it will not be operational until March
2012.
— Valuation: We base our price target on 6.5x FY12E EBITDA, adjusting for HPCL’s
holding in MRPL and OIL. We use an EV/EBITDA approach given uncertainty over
deregulation and as it is more conservative than using P/BV or dividend yield. The
stock is trading at 7.7x FY12E PE and 9.1x FY12E EV/EBIDTA.
— Risk: For HPCL, we believe the biggest risk factor is a cap on product prices, i.e.,
LPG, kerosene, and diesel ie higher crude price without a corresponding rise in
product prices at the retail level. Competition from the private sector is a threat in the
medium term, in our view.