Buy Hindustan Petroleum Corporation - Motilal Oswal

HPCL reported EBITDA of Rs6.3b for 3QFY11 (v/s our estimate of Rs7.1b), up 4.4x YoY and down 73% QoQ. Lower than estimated EBITDA was due to higher net under-recoveries at Rs5.4b (v/s our estimate of Rs3.4b), partly compensated by higher GRM at US$5.1/bbl (v/s our estimate of US$4.8/bbl). PAT was Rs2.1b (v/s our estimate of Rs2.5b), up 6.7x YoY and down 90% QoQ. HPCL's 9MFY11 PAT was Rs4.2b (v/s our estimate of Rs13b for FY11).

GRM at US$5.1/bbl: GRM for 3QFY11 was US$5.1/bbl (v/s -US$0.3/bbl in 3QFY10; US$2.7/bbl in 2QFY11). The regional benchmark Reuters Singapore GRM was US$5.5/bbl. Refinery throughput stood at 4.1mmt (in line with our estimate), up 10% YoY and 35% QoQ. The significant QoQ jump is due to shutdown in the Visakh refinery in 2QFY11.

Government sharing ad-hoc; clarity only towards end-FY11: In 9MFY11, HPCL's gross under-recovery was Rs103b, of which upstream shared Rs34b and the government shared Rs46b, resulting in net under-recovery of Rs23b. We currently model upstream share at 1/3rd, government share at 57% and OMCs' share at 10%. As in previous years, subsidy sharing is likely to be finalized only towards the end of the year (in 4Q); quarterly sharing is no indication of the final sharing formula. In 9MFY11, the government has announced Rs210b compensation to OMCs (yet to be disbursed by the government) and we expect further compensation in 4QFY11.

Valuation and view: The stock trades at 8.9x FY12E EPS of Rs38.3 and 0.9x FY12E BV. We expect the government to spell out the sustainable subsidy sharing formula (at different oil prices) over the next few months. This should translate into higher valuations for HPCL. Buy.

Source : Equity Bulls

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