HPCL: Takes it on the chin - Views on News from Equitymaster

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HPCL: Takes it on the chin

Feb 19, 2002

The disinvestment buzz around the Hindustan Petroleum Corporation Ltd. (HPCL) scrip seems to have diverted investor attention from the dismal quarterly performance reported by the company. The slowdown in economy that gained grip over the past three quarters has considerably impacted the company. Over this period, the slide in sales has become more precipitous.

(Rs m) 3QFY01 3QFY02 Change 9mFY01 9mFY02 Change
Net Sales 123,369 99,930 -19.0% 333,037 300,030 -9.9%
Other Income 723 496 -31.4% 1,726 1,917 11.0%
Expenditure 117,707 97,466 -17.2% 319,174 290,306 -9.0%
Operating Profit (EBDIT) 5,662 2,464 -56.5% 13,863 9,723 -29.9%
Operating Profit Margin (%) 4.6% 2.5%   4.2% 3.2%  
Interest 1,088 709 -34.8% 2,898 2,242 -22.6%
Depreciation 1,114 1,278 14.8% 3,176 3,722 17.2%
Profit before Tax 4,184 973 -76.7% 9,515 5,676 -40.4%
Tax 800 365 -54.4% 1,900 2,045 7.6%
Profit after Tax/(Loss) 3,384 608 -82.0% 7,615 3,631 -52.3%
Net profit margin (%) 2.7% 0.6%   2.3% 1.2%  
No. of Shares 339 339   339 339  
Diluted Earnings per share* 39.9 7.2   30.0 14.3  
P/E Ratio   35.1     17.7  
*(annualised)            

At the topline, performance of the company is in line with it's peer Bharat Petroleum (BPCL) for the concerned periods. The company has managed to marginally improve volume sales (2.9%), which is encouraging considering that more than 50% of sales is from middle distillates. This category of petroleum products i.e. diesel and kerosene have experienced the steepest declines in consumption. The company has been hit by lower realisations on petroleum products. The drying up of demand has led to prices collapsing internationally. Realisation in domestic markets are down by an estimated 21%, which would be higher in dollar terms. For the nine month period, both volume and realisations are down, impacting turnover.

The drop in sales accompanied with lower margins has considerably impacted the operating performance of the company with profits down sharply. For 3QFY02, at the operating level, the company has been outperformed by BPCL, which managed to protect margins leading to higher operating profits. For 9mFY02, BPCL too reported a 19% slide in operating profits. As compared to the corresponding period last fiscal, oil markets softened considerably in the third quarter. Oil prices, which were trading at an estimated $30/ barrel cooled down to an estimated $22/ barrel. This has pulled down raw material costs. Also, products for re-sale cost has declined substantially due to the sharp slide in petroleum product prices, as compared to crude oil. This is reflected in the lower operating margins of the company, which continued to be under pressure. That said, products for re-sale grew faster than throughput, which could indicate that with refining margins (GRMs) dwindling, the company found it more feasible to build merchant sales.

At Rs 246 the scrip is trading on a multiple of 17.7x 9mFY02 annualised earnings. This is comparatively high considering the stock trades in a P/E band of 4x - 8x earnings. Revaluation of marketing assets by the street post IBP divestment, impending dismantling & deregulation in the sector accompanied with expected disinvestment has led to investors according a higher value to the stock.


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