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HPCL: Disappointing show - Views on News from Equitymaster

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HPCL: Disappointing show
Jan 28, 2008

Performance summary
  • Topline increases by 22% YoY during 3QFY08.

  • EBITDA margins contract to 0.5%, from 0.9% in 3QFY07 due a 23% YoY rise in expenditure and due to increased under recoveries.

  • Other income rises by 7% YoY during the quarter.

  • Bottomline has turned negative owing to erosion in operating margin and higher interest costs.

  • Topline grows 9% YoY, while bottomline declines 27% YoY in 9mFY08.

Financial snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 221,502 271,170 22.4% 671,918 732,332 9.0%
Expenditure 219,562 269,689 22.8% 658,681 718,960 9.2%
Operating profit (EBDITA) 1,940 1,481 -23.7% 13,236 13,372 1.0%
EBDITA margin (%) 0.9% 0.5%   2.0% 1.8%  
Other income 2,466 2,645 7.2% 5,412 8,803 62.7%
Interest 1,046 2,184 108.8% 2,625 4,916 87.3%
Depreciation 1,733 2,161 24.7% 5,176 5,976 15.5%
Profit before tax 1,627 (219) -113.4% 10,847 11,283 4.0%
Tax (2,446) (61) -97.5% 631 3,779 498.9%
Profit after tax/(loss) 4,073 (157)   10,216 7,504 -26.6%
Net profit margin (%) 1.8% -0.1%   1.5% 1.0%  
No. of shares (m)         339.4  
Diluted earnings per share (Rs)*         38.30  
Price to earnings ratio (x)*         6.9  
(* on trailing twelve months earnings)

What has driven performance in 9mFY08?
  • Results have been adversely affected due to high crude and product prices, which could not be fully passed on to the consumers. The under-recovery on MS, HSD, SKO (PDS) and LPG (Domestic) for 9mFY08 was partially compensated from:

    • Discounts from upstream oil companies i.e. ONGC and GAIL, amounting to Rs 33 bn (Rs 30 bn in 9mFY07)

    • In principle approval of the Government of India for issuance of Oil Bonds amounting to Rs 43 bn (Rs 39 bn in 9mFY07) which has been included under sales.

    Cost break-up
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Raw materials 211,646 257,661 21.7% 628,508 683,277 8.7%
    % sales 95.6% 95.0%   93.5% 93.3%  
    Staff cost 1,930 2,174 12.6% 5,789 6,046 4.4%
    % sales 0.9% 0.8%   0.9% 0.8%  
    Other expenditure 5,987 9,854 64.6% 24,385 29,638 21.5%
    % sales 2.7% 3.6%   3.6% 4.0%  
    Total cost 219,562 269,689 22.8% 658,681 718,960 9.2%
    % sales 99.1% 99.5%   98.0% 98.2%  

  • The Gross Refining Margins (GRMs) for 9mFY08 were US$ 6.17 per barrel (last year US$ 4.86) for Mumbai refinery and US$ 6.30 per barrel (last year US$ 3.35) for Vishakapatnam refinery.

  • For 9mFY08, subsidy claim from the government amounted to Rs 4.1 bn (last year Rs 3.9 bn).

What to expect?
At the current prices of Rs 264, the stock trades at price to earnings ratio of 7 times its trailing twelve months earnings. We advise caution at this juncture as high crude prices and regulatory concerns will continue to impact the performance of the company.

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