Buy HPCL - Motilal Oswal

HPCL (HPCL IN; Mkt Cap USD3.1b, CMP Rs436, Buy)

- Reports loss due to no subsidy payment by the government in 1QFY11: HPCL reported EBITDA loss of Rs16.2b in 1QFY11. We had estimated an EBITDA of Rs4.3b. The large variation from our estimate was primarily due to no compensation from the government (v/s our estimate of Rs24.9b compensation) in 1QFY11. Reported net loss for 1QFY11 was Rs18.8b (v/s PAT of Rs6.5b in 1QFY10 and Rs7.5b in 4QFY10).

- GRM of US$3.7/bbl in line with benchmark Singapore GRM; lower throughput due to shutdowns: HPCL reported GRM of US$3.7/bbl, in line with our estimate of US$3.6/bbl. The company had reported GRM of US$5.7/bbl in 1QFY10 and US$3.2/bbl in 4QFY10. Combined throughput for its Mumbai and Visakh refinery was 3.3mmt (v/s our estimate of 3.9mmt), down 20% YoY and 16% QoQ, led by planned shutdowns.

- Net 1QFY11 subsidy sharing at 67%; we model HPCL's sharing at 11% in FY11: The government has not announced any compensation for 1QFY11 for the OMCs (HPCL, BPCL and IOC) till date, resulting in large burden of under-recoveries on the OMCs. In 1QFY11, HPCL's net sharing post upstream discounts stood at Rs29.4b (67% of HPCL's gross under-recoveries). Upstream share stood at 1/3rd level, leading to Rs14.7b discounts to HPCL in 1QFY11.

- Upgrading estimates; maintain Buy: We assume that OMCs will share 11% of gross under-recoveries in FY11 and FY12. The stock trades at 10.9x FY11E EPS of Rs40 and 1.2x FY11E BV. We expect the stock to trade at higher valuations than the recent past due to improvement in the (1) earnings quality, (2) RoCE & RoE, (3) cash cycle and (4) lower debt levels. Maintain Buy.

Source : Equity Bulls

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