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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
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
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
