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HPCL: Bottomline up sevenfold! - Views on News from Equitymaster
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HPCL: Bottomline up sevenfold!
Feb 12, 2011

HPCL has announced its 3QFY11 results. The company has reported a 22% YoY growth in sales and a whopping 572% YoY increase in bottom line. Here is our analysis of the results.

Performance summary
  • Topline increases by 22.2% YoY in 3QFY11. For the 9 months period, topline registered an increase of 22.5% YoY.
  • Operating profits surged by 120.2% YoY for the quarter. For the 9 months period, the operating profits declined by 6.6% YoY.
  • Interest costs were up by 9.7% YoY. For the 9 months period, the interest costs declined 11.0% YoY.
  • Bottomline accelerated by 572% YoY. For the 9 months period, the net profits declined by 23.1% YoY.


(Rs m) 3QFY 10 3QFY 11 Change 9mFY 10 9mFY 11 Change
Net sales 278,742 340,560 22.2% 769,393 942,277 22.5%
Expenditure 275,198 332,758 20.9% 750,869 924,985 23.2%
Operating profit (EBDITA) 3,544 7,802 120.2% 18,524 17,293 -6.6%
EBDITA margin (%) 1.3% 2.3%   2.4% 1.8%  
Other income 2,250 1,449 -35.6% 5,780 5,315 -8.0%
Interest 2,202 2,417 9.7% 7,398 6,585 -11.0%
Depreciation 3,007 3,647 21.3% 8,469 10,054 18.7%
Profit before tax 585 3,188 445.2% 8,438 5,968 -29.3%
Profit before tax margin (%) 0.2% 0.9%   1.1% 0.6%  
Tax 270.7 1077.6 298.1% 3,001 1,789 -40.4%
Profit after tax/(loss) 314 2,110 572.1% 5,437 4,179 -23.1%
Net profit margin (%) 0.1% 0.6%   0.7% 0.4%  
No. of shares (m)         339  
Diluted earnings per share (Rs)*         34.7  
P/E ratio(x)*         9.9  
* On a trailing 12 months basis

What has driven performance in 3QFY11?
  • The 22.2% YoY increase in topline was supported both by 10% and 6% increase in thruput and market sales respectively. The company also managed to realized better average gross refining margins that came at US$3.96 per barrel (up 58% YoY for the 9 months period).

  • Operating profits margins came at 2.3% versus 1.3% last year. The margins improved on back of partial compensation for under recoveries by Government and upstream companies. The increase was also due to better cost management as raw materials expenses declined by 1.3% (as a % of sales).

  • The company accounted subsidies on final petroleum products to the extent of Rs 4,806 m versus subsidies of Rs 4,482 m for 9mFY10. For the first 9 months, the company received a sum of Rs 45.8 bn from the Government as a partial compensation for under recoveries (versus Rs 19 bn for 9mFY10). The subsidies from upstream segment for the first 9 months came at Rs 34.2 bn versus 19 bn for 9mFY10.

    Cost break-up
    (Rs m) 3QFY10 3QFY11 Change 3QFY10 3QFY11 Change
    Raw materials 258,985 312,146 20.5% 701813.6 872145.8 24.3%
    % sales 92.9% 91.7%   91.2% 92.6%  
    Staff cost 3,143 4,244 35.1% 10,830.80 12,311.90 13.7%
    % sales 1.1% 1.2%   1.4% 1.3%  
    Other expenditure 13,071 16,368 25.2% 38,224.40 40,526.80 6.0%
    % sales 4.7% 4.8%   5.0% 4.3%  
    Total cost 275,198 332,758 20.9% 750,869 924,985 23.2%
    % sales 98.7% 97.7%   97.6% 98.2%  

  • Net profits, though up by 572% YoY, declined 90% on a QoQ basis. The net profit margins for the current quarter came at 0.6% versus 0.1% for 3QFY10 and 6.7% for 2QFY11.

What to expect?
Although the government has taken steps towards the deregulation of petrol prices, given their 'aam aadmi' mandate and the political opposition to such a move, it seems unlikely that a genuine structural change will actually be sustained. Moreover, the government's has not been able to take deregulation call for diesel as crude prices have risen from the earlier levels.

At the current prices of Rs 342 per share, the stock is trading at a multiple of 6.4 times our FY13 earnings estimates (Rpro subscribers please click here). While it looks cheap on a PE basis, we continue to advise caution on the stock as interest costs and regulatory concerns will continue to impact the short-term business performance of the company.

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