For Q2’09, Hindustan Petroleum Corporation Limited (HPCL) reported a net loss of Rs32.2 billion on account of higher crude oil prices that could not be fully passed on to the consumers.
However, the conditions are getting better as crude oil prices have plunged in the past few weeks to levels below the estimated break-even point. This significant change in crude oil prices augurs well for the company.
The recent weakening of the rupee, however, has caused the break-even point to fall further, now estimated at around $60 per barrel at the current exchange rate.
We believe that the rupee has depreciated primarily because of the heavy dollar outflows; it should improve in the near-to-medium term, thereby adding to the Company’s profitability.
With the general elections barely five months away and the political parties recognising the need to address the impact of inflation on the common man, the new government may attempt to reduce the fuel prices in the near term.
Such a move will adversely affect the company’s profitability. However, given the declining trend of the inflation rate, we do not expect any significant reduction in the fuel prices.
Nonetheless, we have considered an average price cut of Rs2.5 in our estimates. We have revised our estimates to incorporate the recent fall in the crude prices and the depreciating rupee.
In the current scenario, we believe that HPCL will be able to generate profits in the upcoming quarter. Based on our valuation, we have arrived at a fair price value Rs265, implying an upside potential of 16.2%. Thus, we upgrade our rating on the stock to BUY.