• HPCL reported net sales growth of 32.5% yoy in Q2 FY13 propelled mainly on back of accounting of government compensation (Rs66.7bn in Q2 FY13 vis-à-vis nil in Q2 FY12).  Sans the government compensation a growth of 12.3% yoy in sales was observed helped by a 19.7% yoy surge in market sales (7.2mmt). Total refinery throughput (Mumbai + Vizag) at 3.65mmt indicated a sharp decline of 12.9% yoy although a small improvement of 2% was observed qoq.

• The quarter saw cash compensation announcement from the government (not received), wherein HPCL accounted Rs66.7bn towards meeting its H1 FY13 under recoveries (Rs32.7bn in H1 FY12). Of the gross under recoveries, Rs33.5bn was borne by the upstream companies in form of discounts (Rs15.6bn in Q2 FY12). For the first half of the year, the net under recoveries for HPCL stood at Rs56.5bn as compared to Rs61.8bn in H1 FY12.

• Quarterly GRM’s were recorded at $4.3/bbl enabling the company to clock a cumulative GRM of $1.19/bbl for the H1 FY13. The higher GRM’s in the quarter were driven by the increase in product cracks as exhibited by the Singapore GRM’s.

• HPCL reported a profit of Rs23.3bn vis-à-vis a loss of Rs33.6bn in Q2 FY12 and a loss of Rs92.5bn in Q1 FY13. HPCL remains to have a lowest Refining to Marketing mix among all the oil marketing companies and thereby remains most exposed the subsidy payout uncertainties. While this quarter has been helped by the government sharing, going ahead the profitability will continue to hinge on the timely cash disbursements. We do not see any near term triggers on the stock and continue to rate the stock as Market performer.

Cost analysis