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HPCL: Out of hands - Views on News from Equitymaster
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HPCL: Out of hands
Jan 31, 2006

Performance Summary
If the recent 'portfolio shuffle' (as they call it the ruling Congress-led coalition government) is any indication, there will probably be action in the energy sector in the next three to six months. While a lot has changed in the last three years for the oil companies, lack of action at the policy level is hurting oil marketing companies in a substantial manner. Net loss of HPCL, in 3QFY06, has crossed Rs 10 bn level! Hurray!

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 162,271 182,610 12.5% 434,099 502,020 15.6%
Expenditure 157,070 191,406 21.9% 417,695 513,833 23.0%
Operating profit (EBDITA) 5,201 (8,796) - 16,404 (11,812) -
EBDITA margin (%) 3.2% -4.8%   3.8% -2.4%  
Other income 457 504 10.1% 1,682 1,816 8.0%
Interest 319 559 74.9% 650 1,009 55.2%
Depreciation 1,623 1,751 7.9% 4,718 5,158 9.3%
Profit before tax 3,717 (10,602) - 12,717 (16,163) -
Tax 1,357 176 -87.1% 4,942 (86) -101.7%
Profit after tax/(loss) 2,359 (10,778) - 7,775 (16,078) -
Net profit margin (%) 1.5% -5.9%   1.8% -3.2%  
No. of shares (m) 338.9 338.9   338.9 338.9  

What is the company's business?
HPCL is the country’s third largest integrated oil marketing company with over 6,000 retail outlets (nearly 27% of the total) spread across the length and breadth of the country. The company has just over 20% market share in the diesel business and a 25% market share in retail petrol sales. Also, HPCL has strong presence in the LPG business, accounting for a quarter of the industry volumes and catering to over 19 m customers. The company operates two refineries, one at Visakhapatnam, with a rated capacity of 7.5 million metric tonnes (MMT) and the other at Mumbai, having capacity of 5.5 MMT.

What has driven performance in 3QFY06?
Staid volume growth: Even as the industrial activity continues to remain buoyant and automobile sales hitting new highs in absolute terms, the crude throughput in 3QFY06 was lower by 3.6% YoY and the same for 9mFY06 was down 9.6% YoY. From what we understand from the performance of BPCL, the overall demand for diesel during the year has been weak (down 9% YoY in 9mFY06) while that of petrol, aviation fuel, naphtha and natural gas were strong. Also, the gross refining margins have also come under pressure during the fiscal, which is evident from the graph below (this is after taking into consideration the under-recoveries). As we go forward, while diesel and petrol demand are likely to grow at around 3% to 4% per annum, natural gas and aviation fuel volumes are likely to remain robust.

Will punish you if you grow: The current policy environment is such that if oil marketing companies sell more, the loss will increase. While it is known to everyone that the reason for the same is that the prices at the retail level have failed to increase proportionate to the increase in cost of inputs, the concerning factor is that the scenario is not changing for the better. With crude prices continuing to trade firm in the global markets, the absence of any policy-level developments are negative signs for the sector as a whole. The graphs below highlights the comparative topline and operating margins of BPCL and HPCL and evidently, there is not much to choose from.

Cash flows under strain: With the company posting loss at the operating level, given the expansion plans and working capital requirements of HPCL, the sharp rise in interest charges in 3QFY06 and 9mFY06 is not surprising. The net loss as of 9mFY06 stands at Rs 16 bn and the loss is expected to widen in the forthcoming quarter if the government continues to postpone key policy decisions.

What to expect?
At Rs 306, the stock is trading at a price to book value multiple of 1.2 times FY05 networth. Assuming Rs 18 bn as the net loss for the FY06, the book value will be affected to the tune of Rs 50 per share. The proposed oil bond issue seem to be in limbo and all depends on what the new Petroleum Minister does with respect to safeguarding PSU oil majors from bleeding further.

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