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Gearing up for competition - Views on News from Equitymaster
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  • Mar 17, 2001

    Gearing up for competition

    Hindustan Petroleum Corporation Ltd. (HPCL) was born from the wave of nationalization that swept across the country in the seventies. ESSO Standard Refining Company Ltd. was merged with Lube India to form HPCL. The interest of ESSO was then taken over by the Government in 1974, which was the genesis of HPCL of today.

    The company has had a favourable track record consistently meeting the targets laid down in the Memorandum of Understanding (MoU) with Government of India. The current fiscal, however, has been a tough one for the industry as a result these organizations are attempting to de-risk their business by spreading themselves along the petroleum chain.

    (Rs m) 9m FY00 9m FY01 Change
    Sales 233,463 360,021 54.2%
    Other Income 680 1,726 153.7%
    Expenditure 219,844 346,158 57.5%
    Operating Profit (EBDIT) 13,619 13,863 1.8%
    Operating Profit Margin (%) 5.8% 3.9%  
    Interest 812 2,898 256.8%
    Depreciation 4,018 3,175 -21.0%
    Profit before Tax 9,469 9,516 0.5%
    Tax 2,464 1,900 -22.9%
    Profit after Tax/(Loss) 7,004 7,616 8.7%
    Net profit margin (%) 3.0% 2.1%  
    No. of Shares (eoy) 339 339  
    Diluted Earnings per share* 28 30  

    The Finance Minister in the recent budget has stated the intentions to abide by the original administered pricing dismantling schedule. The industry consequently will undergo structural changes as competition and free marketing pricing enter the protected bastions of the public sector. To face the challenges in the new industry scenario HPCL is chalking out plans to establish a foothold in both the up and downstream sector.

    The company in the current fiscal commissioned an additional refining capacity of 3 MMTPA (million metric tones per annum) at Visakh. This takes the aggregate capacity of the plant to 13.5 MMTPA representing 12 percent of the country's total refining capacity. To add to this HPCL has plans to set up a 9 MMTPA Greenfield refinery at Bhatinda, Punjab. The management envisages an outlay of Rs 98 billion ($ 2.1 billion) towards this project and has already incurred expenses to the tune of Rs 3 billion ($ 64.5 million) this fiscal. The project will facilitate in establishing a foothold in the important consumption zone of North India, which currently faces a deficit.

    The Government is also planning on decanalising imports of crude oil. HPCL can now directly source its crude from the international markets without having to go through the sole canalizing agency, Indian Oil Corporation (IOC). As a step to further reduce the risk in supply of crude the company has ventured into exploration and production (E&P) through a JV company, Prize Petroleum Company Ltd, with financial institutions. This company plans to evaluate opportunities both in the domestic as well as international markets. It has also stated that it is not averse to acquiring companies.

    With import facilities, refineries and markets geographically spread apart, transportation of crude and petroleum products is emerging as a key area in enhancing cost competitiveness. HPCL already operates an estimated 500 kilometers (Kms) of pipeline. Petronet India, a joint venture set up by the oil majors, has the mandate to build independent pipelines across India on the common carrier principle. HPCL has been roped in as the co-promoter for the Mangalore-Bangalore (MHB) and Bhatinda-Udhampur link. The Petronet MHB project envisages laying down a 364 Kms pipeline to cater to the key markets in Karnataka. It will source petroleum products from Mangalore Refinery (MRPL), which is a joint venture between HPCL and the A.V. Birla group. The Bhatinda-Udhampur link is a similar initiative to cater to the important consumption zones of Punjab and Jammu & Kashmir.

    To promote consumption of cleaner fuels the Government has kept the excise and custom duty rates on LPG (liquefied petroleum gas) and CNG (compressed natural gas) lower than the rates on other fuels. HPCL has stated intentions to ramp up its LPG bottling capacity to meet the increased demand. Also it has entered into a JV with TotalFina-Elf for constructing an LNG (liquefied natural gas) terminal on the East Coast with a 60,000 TPA underground storage facility. The decision to choose the East Coast seems to be driven by the fact that the Western Region has already tied up sufficient LNG terminal capacity.

    Lubricants, is amongst the highest margin businesses for the refining companies. However, the segment has been facing a slow down over the last two years. Also, competition has heated up, as all players want a part of the gravy. Consequently, companies are becoming more brand conscious and marketing savvy. HPCL has also focused energies on building brands. It has targeted the low priced segment and has tasted success. The strategy paid off well as this segment is catered to by the unorganized sector that has limited capacity to fight back. In light of this the company has augmented its lubricant capacity by 60,000 TPA.

    Nevertheless, most of the initiatives will only fructify over the long term. The immediate concerns remains the movement of crude oil prices as adverse movements will impact the bottomline of these companies. Also, the plans of the Government with respect to disinvesting from HPCL are nebulous and the possibility of this event occurring in the next fiscal looks bleak. However, the sector holds a lot of opportunities with the opening up of the industry and HPCL could be one of the key gainers as it has access to marketing infrastructure.



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