Hindustan Petroleum Corporation Limited

RESEARCH
EQUITY RESEARCH September 23, 2009

RESULTS REVIEW Hindustan Petroleum Corporation Limited Buy

Strong Q1’10 performance on the back of lower under-recoveries
Share Data
For Q1’10, Hindustan Petroleum Corporation Limited (HPCL) reported net
Market Cap Rs. 132.42 bn
sales of Rs. 242 bn, a decline of 30.4% yoy from Rs. 347.5 bn, due to a fall
Price Rs. 391.05
BSE Sensex 16,719.50 in average fuel price realisations. However, lower under-recoveries has
Reuters HPCL.BO helped the company post an EBITDA of Rs. 13.3 bn. Further, a 33% decline
Bloomberg HPCL IN in interest expenses and a forex gain of Rs. 1.6 bn helped the Company
Avg. Volume (52 Week) 0.33 mn register a net profit of Rs. 6.5 bn, against a loss of Rs. 8.9 bn in Q1’09.
52-Week High/Low Rs. 425/164.1 Average GRMs were lower at USD 5.7/bbl, as compared to USD16.5/bbl in
Shares Outstanding 338.63 mn Q1’09.

Increasing crude prices, cause for concern: For Q1’10, the average
Valuation Ratios (Consolidated)
benchmark WTI crude prices rose 38.7% qoq to USD 59.5/bbl, as against
Year to 31 March 2010E 2011E
USD 42.9/bbl in Q1’09. Average under-recovery in the period stood at
EPS (Rs.) 45.6 46.8
+/- (%) 105% 2% Rs. 2.3/litre in petrol, Rs. 0.3/litre in diesel, Rs. 11/litre in kerosene, and
PER (x) 8.6x 8.4x Rs. 85/cylinder in LPG. On the back of the recovery in the global economy,
EV/ Sales (x) 0.2x 0.2x average crude prices are moving north and have already reached
EV/ EBITDA (x) 7.0x 6.5x ~USD 70/bbl. At the current prices, average under-recovery stands at

Rs. 2.5/litre in petrol, Rs. 1/litre in diesel, Rs. 150/cylinder in LPG and
Shareholding Pattern (%)
Rs. 16/litre in kerosene. We expect crude prices to go up even further to
Promoters 51
USD 75/bbl in the coming quarters leading to a further increase in
FIIs 9
Institutions 29 under-recoveries. Moreover, uncertainty on the subsidy sharing pattern
Public & Others 11 continues to cloud earnings estimates.
Some positives from the Government: OMCs received some positive
Relative Performance news in July 2009 as the Government increased petrol prices by Rs. 4/litre
and diesel prices by Rs. 2/litre, which will provide a marginal relief in
450
400 reducing under-recoveries. Further, the Oil Secretary indicated a new
350
300 subsidy-sharing pattern through which under-recoveries from the sale of
250
200 LPG and kerosene will be met by the Government and the precise mode will
150
100 be decided in due course in consultation with the Ministry of Finance.
50
Key Figures
May-09
Nov-08

Apr-09

Aug-09
Sep-08
Oct-08

Dec-08
Jan-09
Feb-09
Mar-09

Jun-09
Jul-09

Sep-09

Data Q1'09 Q4'09 Q1'10 YoY% QoQ%

(Figures in Rs. mn, except per share data)

HPCL Rebased BSE Index Net Sales 347,493 251,542 241,976 (30.4%) (3.8%)
EBITDA (4,110) 54,374 13,262 N.M. (75.6%)

Adj. Net Profit (8,881) 53,814 6,491 N.M. (87.9%)

Margins(%)
EBITDA (1.2%) 21.6% 5.5%
NPM (2.6%) 21.4% 2.7%

Per Share Data (Rs.)

Normalised EPS (26.2) 158.6 19.2 N.M. (87.9%)
Please see the end of the report for disclaimer and disclosures. -1-
 Hindustan Petroleum Corporation Limited
RESEARCH
EQUITY RESEARCH September 23, 2009

The proposed policy, if implemented, will hugely benefit HPCL, as it is one of

the largest providers of LPG in India.

Valuation
We hold an optimistic outlook of the Company keeping in mind the recent
recovery in the economy and the fuel price hike. Accordingly we have
revised our estimates to consider these developments. Based on its current
market price (CMP) of Rs. 391, the stock trades at a forward P/E of 8.6x and
8.4x for FY10E and FY11E, respectively, which is at a discount to other
public refineries. Our peer group-based relative valuation based on
FY 10 PE multiples implies a target fair value of Rs. 479, which provides a
23% upside potential from the CMP. Thus, we reiterate our Buy rating for the
stock.

Key Risks

The following factors may pose a significant threat to our rating:

• Increase in international crude prices beyond expectations
• Uncertainty about the Government’s policy on loss sharing

Recent Developments

Visakha refinery set to produce Euro compliant products: HPCL has

started producing Euro III quality petrol at Mumbai and is gearing up to
produce from its Visakha refinery by April 2010. Euro IV quality petrol would
be available at both the refineries by the end of FY11. The Company is
expected to invest ~Rs. 69 bn for the project. India aims to move to BS III
norms across the country and BS IV across 11 cities in 2010.

Scouting inorganic growth opportunities: HPCL is considering acquiring

downstream assets of Royal Dutch Shell plc. in New Zealand. Shell New
Zealand Ltd., a unit of Royal Dutch Shell plc, has appointed UBS AG (UBS)
to sell the bulk of its downstream assets.

Please see the end of the report for disclaimer and disclosures. -2-
 Hindustan Petroleum Corporation Limited
RESEARCH
EQUITY RESEARCH September 23, 2009

Result Highlights and Outlook

Top line constrained by low realisations
In spite of a 11% yoy increase in market sales, net sales in Q1’10 plunged
by 30.4% yoy to Rs. 242 bn primarily due to a drop in average price
realisations. The recent fuel price hike will help the Company improve
realisations to a certain extent in the coming quarters but realisations are
expected to be weak compared to FY09.

Trend in Throughput and Market Sales

8.00

6.00
MMT

4.00

2.00

0.00
Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09 Q4'09 Q1'10

Market Sales Crude Throughput

Significant improvement in EBITDA margins

HPCL reported an increase of 6.7pts yoy in the EBITDA margin at 5.5% in
Q1’10 vs. negative 1.2% in Q1’09. The profit is mainly attributable to the fall
in under-recoveries due to lower crude prices, as compared to FY09. Net
under-recoveries during the quarter came down to Rs. 9.9 bn from
Rs. 27.6 bn yoy. Adjusted net profit margin improved to 2.7% vs. negative
2.6% in Q1’09. In terms of refining margins, the GRMs were lower at USD
5.7/bbl, compared to USD16.5 /bbl in Q1’09.

Key Figures (Consolidated)

Year to March FY07 FY08 FY09 FY10E FY11E CAGR (%)
(Figures in Rs mn, except per share data) (FY09-11E)

Net Sales 939,695 1,103,591 1,290,546 1,116,192 1,262,636 (1.1%)

EBITDA 26,959 19,035 32,660 36,597 39,289 9.7%
Adj. Net Profit 16,771 13,641 7,572 15,487 15,873 44.8%

Margins(%)

EBITDA 2.9% 1.7% 2.5% 3.3% 3.1%

NPM 1.8% 1.2% 0.6% 1.4% 1.3%

Per Share Data (Rs.)

Normalised EPS 49.5 40.2 22.3 45.6 46.8 44.8%
PER (x) 5.0x 6.4x 12.1x 8.6x 8.4x

Please see the end of the report for disclaimer and disclosures. -3-
 Hindustan Petroleum Corporation Limited
RESEARCH
EQUITY RESEARCH September 23, 2009

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