Hindustan Petroleum Corporation Limited (HPCL) reported a growth of 17.4% y-o-y in the consolidated net sales for FY08 led by the higher volume of 24.46 MMT and soaring crude oil prices.
The improvement in net sales can also be attributed to the issue of oil bonds worth Rs77 billion by the Government of India (GoI). In addition, the gross refining margins (GRM) improved significantly to $5.98/bbl (up 25.1% y-o-y) for the Mumbai refinery and $6.98/bbl (up 98.9% y-o-y) for the Visakh refinery.
To combat the soaring crude oil prices, the government undertook yet another price hike in June 2008. The major portion of the underrecoveries would continue to be absorbed by the oil companies and the government, as a price hike of Rs21.4/litre of petrol, Rs31.6/litre of diesel, and Rs353 per LPG cylinder was required to absorb under-recoveries completely.
Though the recent price revision has brought some respite to the OMCs, we believe that the rising crude prices without a corresponding increase in the retail selling prices is likely to adversely impact the profitability.
At the current price of Rs186.80, the stock trades at a forward P/E of 7.2x and 5.6x for FY09E and FY10E, respectively. Considering the insufficient price revision and the tightened liquidity situation, we downgrade our rating from Buy to HOLD.