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HPCL: Interest cost hits hard
Jan 28, 2009

Performance summary
  • Topline increases by 8% YoY in 3QFY09.
  • EBITDA margins improve this quarter to 1.8%, up from 1.2% in 3QFY08.
  • Other income increases by 11% YoY during the quarter.
  • Interest costs zoom 264% pushing the bottomline deep into the red.
  • For 9mFY09, the topline grows by 35% while the bottomline turns red.


Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 272,803 294,438 7.9% 737,522 997,742 35.3%
Expenditure 269,546 289,144 7.3% 718,960 1,021,650 42.1%
Operating profit (EBDITA) 3,257 5,295 62.6% 18,562 (23,908)  
EBDITA margin (%) 1.2% 1.8%   2.5% -2.4%  
Other income 872 968 11.0% 3,472 3,035 -12.6%
Interest 2,187 7,961 264.1% 4,776 17,049 257.0%
Depreciation 2,161 2,482 14.9% 5,976 7,268 21.6%
Profit before tax (219) (4,180)   11,283 (45,191)  
Tax (61) 40   3,779 100 -97.4%
Profit after tax/(loss) (157) (4,220)   7,504 (45,291)  
Net profit margin (%) -0.1% -1.4%   1.0% -4.5%  
No. of shares (m)         339  

What has driven performance in 3QFY09?
  • HPCL’s gross refining margins for 9mFY09 were US$ 2.81 per barrel (US$ 6.17 per barrel in 9mFY08) for its Mumbai refinery and US$ 1.02 per barrel (US$ 6.3 per barrel in 1HFY08) for its Visakh refinery.

  • HPCL’s financial results for 9mFY09 have been adversely affected due to high crude and product prices for most par to the period, which could not be fully passed on to the consumers. The under recovery was partially compensated by way of discounts from upstream oil companies, i.e. ONGC and GAIL in respect of crude oil / LPG / kerosene purchased from them amounting to Rs 66.2 bn (Rs 33.2 bn in 9mFY08) and oil bonds to the tune of Rs 126.5 bn (Rs 42.5 bn in 9mFY08).

  • During 9mFY09, HPCL’s subsidy claim from the government towards sale of domestic LPG and PDS kerosene amounted to Rs 4.3 bn (Rs 4.1 bn in 9mFY08).

  • Raw material costs (as a % of sales) remained stable during 3QFY09 as compared to 3QFY08. However, staff costs increased to 1.4% (as a % of sales) in 3QFY09 from 0.8% in 3QFY09. This was in part due to the provision of gratuity considering the impact of pay revision.

  • HPCL incurred foreign exchange losses to the tune of Rs 6 bn during 9mFY09, as opposed to foreign exchange gains to the tune of Rs 3.8 bn in 9mFY08.

  • HPCL’s interest cost during 9mFY09 zoomed 257% as the company had to resort to borrowings when internal accruals dried up during 2008.

What to expect?
At the current prices of Rs 271, the stock trades at price to earnings ratio of 6.5 times our FY11E consolidated earnings. We continue to hold a negative view on the stock as the rupee dollar exchange rate, a heavy debt burden and persisting structural problems will continue to impact the short-term performance of the company while poor return on incremental capital expenditure will impact the long-term performance of the company.

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