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HPCL: Inventory loss drags performance - Views on News from Equitymaster
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HPCL: Inventory loss drags performance
Feb 26, 2015

Hindustan Petroleum Corporation Ltd (HPCL) has announced the results for the quarter ended December 2014. The company has reported 7.8% YoY decline in the topline while net losses for the quarter stood at Rs 3.2 bn. Here is our analysis of the results.

Performance summary
  • For the quarter, sales were down 7.8% YoY.
  • The operating loss for the quarter stood at Rs 406 m with operating loss margins at 0.1%, versus 1.8% in 3QFY14.
  • The company reported net loss of Rs 3.2 bn during the quarter.
  • The average gross refining margins (GRMs) for the quarter were negative, and stood at US$ (1.02) per barrel, from US$ 2.31 per barrel in 3QFY14.
  • The subsidies on PDS kerosene and domestic LPG amounted to Rs 1.9 bn in 3QFY15 (up 29% YoY).
  • The discount from the upstream companies (compensation for under recoveries) stood at Rs 24.4 bn, down 34% YoY.
  • The support from the Government (compensation for under recoveries) stood at Rs 11.4 bn (down 51% YoY).
  • The crude throughput for the quarter stood at 3.96 million tonnes (MT), versus 4.49 MT in 2QFY15 and 3.84 MT in 3QFY14.
  • The market sales (including exports) for the quarter came in at 8.06 MT, versus 7.81 MT in 3QFY14 and 7.36 MT in the preceding quarter.

Financial summary
Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Total Operating revenues 554,368 511,062 -7.8% 1,591,043 1,620,107 1.8%
Expenditure 564,556 511,468 -9.4% 1,598,816 1,598,614 0.0%
Operating profit (EBDITA) -10,188 -406 nm -7,774 21,493 nm
EBDITA margin (%) -1.8% -0.1%   -0.5% 1.3%  
Other income 2,009 2,174 8.2% 6,487 6,906 6.5%
Interest 3,594 2,370 -34.1% 11,377 5,534 -51.4%
Depreciation 5,566 4,386 -21.2% 16,091 14,162 -12.0%
Profit before tax before exceptional items -17,339 -4,987 nm -28,755 8,702 nm
Profit before tax margin (%) -3.1% -1.0%   -1.8% 0.5%  
Tax 0 -1,733 nm 0 2,994 nm
Profit after tax/(loss) -17,339 -3,254 nm -28,755 5,709 nm
Net profit margin (%) -3.1% -0.6%   -1.8% 0.4%  
No. of shares (m)         339  
Diluted earnings per share (Rs)*         153.0  
P/E ratio(x)*         3.9  
*On the basis of trailing 12 months

What has driven performance in 3QFY15?
  • Market sales (including exports) for the quarter increased 3.2% YoY while the refineries at Mumbai and Visakh processed 3.96 million tonnes of crude as against 3.84 million tonnes in the previous year. However, the sales declined by 7.8% YoY due to lower overall realisations.

  • For the quarter, despite compensation for under recoveries, there was a loss of Rs 406 m as compared to a loss of Rs. 10.2 bn in the same period last year. The loss in this quarter was mainly due to significant drop in the international crude (Indian crude basket fell from US$ 94 per barrel in the beginning of the quarter to US$54 per barrel at the end of the quarter) and product prices in the international markets, resulting in inventory losses worth Rs 18 bn (as compared to inventory gains of Rs 8 bn) for the firm. Because of the inventory loss, the GRMs for the quarter were negative.

    Cost breakup
    (Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
    Raw materials 541,651 482,078 -11.0% 1,512,603 1,516,355 0.2%
    % sales 97.7% 94.3%   95.1% 93.6%  
    Staff cost 5,570 5,724 2.8% 15,643 18,066 15.5%
    % sales 1.0% 1.1%   1.0% 1.1%  
    Other expenditure 17,335 23,666 36.5% 70,570 64,192 -9.0%
    % sales 3.1% 4.6%   4.4% 4.0%  
    Total costs 564,556 511,468 -9.4% 1,598,816 1,598,614 0.0%
    % sales 101.8% 100.1%   100.5% 98.7%  

  • For the quarter, the net loss came in at Rs 3.2 bn, versus a net loss of Rs 17.3 bn in the corresponding quarter last year. The interest and depreciation expenses for the quarter declined 34% YoY and 21% YoY respectively.
What to expect?

The diesel deregulation will help OMCs in better working capital management and lower interest costs. Besides, HPCL's high debt to equity ratio is beyond our comfort levels. Further, there is a risk of private players become aggressive in oil marketing space. The management expects inventory losses not to recur as crude prices seem to recovering from the lows seen earlier.

The stock is currently trading at a trailing 12 months price to earnings ratio of 3.9 times. At current valuation, the stock seems to be pricing in the upsides. We suggest investors not to buy the stock at current prices.

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