>HINDUSTAN PETROLEUM CORPORATION: Strong 3Q, but remains in red for 9M FY12

Strong 3Q result boosted by higher upstream disc. /govt. subsidy HPCL reported strong 3QFY12 PAT of INR27.3bn (1HFY12 had losses of INR64.5bn) ahead of our estimate of INR18.6bn. Higher upstream discount at ~47% or INR33.5bn (our est 33% or 22.6bn) and government subsidy at INR65.8bn (our est 65.5bn) boosted the bottom-line. Adjusted for higher upstream discount, numbers were broadly in-line.


Key highlights of 3Q results:
■  Gross U/Rs at INR71.3bn increased 108% y-y, 52% q-q. But higher upstream discount and govt. subsidy resulted in improved bottom-line.
■  During 3Q upstream companies were made to share higher 47% of gross U/Rs (share in 1HFY12 was 1/3rd).
■  Similar to first two quarters of FY12, government agreed to provide INR150bn as compensation for under-recoveries. Oil marketing companies accounted for total INR300bn of government compensation in 3Q (HPCL share 65.8bn) including INR150bn support for 2Q which was announced post 2Q results.
■  Operating performance was largely on expected lines.
■  Refining margins at US$4.8/bbl also improved ~150% q-q.
■  Sharp increase in interest cost at INR7.0bn (up 189% y-y, 131% q-q) is a key concern.


Yet, HPCL remains in red for 9MFY12 with net loss of INR37.2bn 
Despite strong 3Q result, HPCL remains in losses for 9M FY12 with net loss of INR37.2bn (vs 9MFY11 /FY11 PAT of INR 4.2bn / 15.4bn). Even as we believe that for the full year FY12, HPCL would come back in profits with govt. / upstream support, profits are likely to remain low and ad-hoc. More than operating performance, under-recoveries and the sharing mechanism continue to be the key determinants of profit (or loss) for HPCL, in our view. The bottom lines of oil marketing companies (OMCs) remain at the mercy of the government-dictated sharing mechanism. And the whole subsidy-sharing process remains quite adhoc and non-transparent, in our view.


Subsidy sharing remains a concern, Maintain Neutral
The ad-hoc, non-transparent and uncertain subsidy-sharing process remains a key concern for OMCs. We still believe that for OMCs to emerge as potential long-term investment ideas, further clarity is needed on future steps towards deregulation, as well as sharing mechanism. We remain NEUTRAL on HPCL.

RISH TRADER