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HPCL: Bottomline in red
Feb 13, 2014

Hindustan Petroleum Corporation Ltd (HPCL) has announced the results for the third quarter ending December 2013. For the quarter, the company has reported 3.8% year on year (YoY) growth in sales and net loss of Rs 17 bn at the bottomline level. Here is our analysis of the results.

Performance summary
  • For the quarter, sales were up 3.8% YoY. For nine months ending December 2013 (9mFY14), HPCL reported 9.4% YoY growth in the revenues.
  • The company reported operating loss of Rs 9.3 bn during the quarter as compared to Rs 10.7 bn of profits in 3QFY13 due to high under recovery absorption. For the nine months, loss stood at 7.7 bn, as compared to operating loss of Rs 60.6 bn in 9MFY13.
  • The company reported net loss of Rs 17 bn during the quarter as compared to a net profit of Rs 1.4 bn in 3QFY13 mainly on account of less than due compensation for bearing under recoveries . For 9MFY14, HPCL booked net losses of Rs 28.8 bn, with net loss margins at 1.8%, as compared to net loss margin of 4.7% in 9MFY13.
  • The crude thruput for the quarter stood at 3.84 million tonnes (MT) versus 3.89 MT in 2QFY14 and 4.22 MT in 3QFY13. For the nine months, the crude thruput stood at 11.17 MT, down from 11.46 MT in 9MFY13.
  • The market sales (including exports) for the quarter stood at 7.81 MT as compared to 7.20 MT in the preceding quarter and 7.73 MT in 3QFY13. For the nine months, the market sales (including exports) stood at 22.92, up 1.6% YoY
  • The average gross refining margins (GRMs) for the quarter stood at US$ 2.31 per barrel, down from US$ 3.88 in the preceding quarter (US$ 1.92 per barrel in 3QFY13). For 9MFY14, the GRMs stood at US$ 2.94 per barrel, up from US$ 1.46 per barrel in 9MFY13.
  • The company has received around Rs 37 bn from upstream companies and Rs 23 bn from the Government as compensation for under recoveries. The overall under recoveries for the quarter stood at around Rs 92 bn. As such, the company had to bear net under recovery burden of around Rs 32 bn.

Standalone performance summary
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 534,139 554,550 3.8% 1,452,914 1,589,099 9.4%
Expenditure 523,432 563,857 7.7% 1,513,505 1,596,834 5.5%
Operating profit (EBDITA) 10,707 -9,307 nm -60,590 -7,736 nm
EBDITA margin (%) 2.0% -1.7%   -4.2% -0.5%  
Other income 2,046 1,965 -4.0% 24,612 8,133 -67.0%
Interest 6,335 4,432 -30.0% 17,337 13,061 -24.7%
Depreciation 4,947 5,566 12.5% 14,430 16,091 11.5%
Profit before tax before exceptional items 1,471 -17,339 nm -67,746 -28,755 nm
Profit before tax margin (%) 0.3% -3.1%   -4.7% -1.8%  
Tax 0 0   0 0  
Profit after tax/(loss) 1,471 -17,339 nm -67,746 -28,755 nm
Net profit margin (%) 0.3% -3.1%   -4.7% -1.8%  
No. of shares (m)         339  
Diluted earnings per share (Rs)*         141.9  
P/E ratio(x)**         nm  
*On a trailing 12 months basis

What has driven performance in 3QFY14?
  • The revenues during the quarter were up by 3.8% YoY on the back of higher product sales, offset by lower crude throughput and high net under recoveries.

  • The company reported operating loss margin of 1.7% during the quarter, as compared to a profit margin of 2.0% in 3QFY13. The raw material cost (as a % of sales) increased to 97.7% during the quarter, up from 93.1% in 3QFY13.However, the other expenses for the quarter declined to 3.0% from 3.9% in 3QFY13. The average gross refining margins during the quarter stood at US$ 2.31 per barrel versus US$ 1.92 per barrel in 3QFY13. HPCL had to bear under recovery burden of Rs 32 bn during the quarter due to less than enough compensation from the upstream sector and the Government.

  • The company has reported a net loss of Rs 17 bn in the quarter due to net under recovery burden absorption. The interest expense for the quarter declined by 30% YoY while depreciation expense increased by 12.5% YoY.

    Cost break-up
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Raw materials 497,236 541,605 8.9% 1,428,729 1,512,557 5.9%
    % sales 93.1% 97.7%   98.3% 95.2%  
    Staff cost 5,303 5,570 5.0% 21,602 15,643 -27.6%
    % sales 1.0% 1.0%   1.5% 1.0%  
    Other expenditure 20,893 16,682 -20.2% 63,174 68,634 8.6%
    % sales 3.9% 3.0%   4.3% 4.3%  
    Total costs 523,432 563,857 7.7% 1,513,505 1,596,834 5.5%
    % sales 98.0% 101.7%   104.2% 100.5%  
What to expect?
The price to earnings ratio currently does not make sense because of the adhoc nature of subsidies., While lower crude prices and hike in the diesel prices have eased under recovery burden to some extent, the under recoveries may go up if rupee depreciates against the dollar. Going forward, if the upstream and Government sector increase subsidy and discount, the company is likely to benefit. However, considering the dependence on external support and high debt on the balance sheet, we suggest that investors should 'Hold' the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation that no single stock comprises more than 5% of your portfolio.

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