Reliance and Essar Oil's entry into the retail segment of the petroleum sector is a good news for the economy. However, whether they would be successful in cornering a reasonable chunk of the market share remains to be seen, with HPCL, BPCL, IOC and IBP already established players in the business. In this article, we consider the strengths of HPCL and its future growth prospects.
HPCL, with a retail network of 5,056 outlets (25% market share) and around 19 m LPG (liquefied natural gas) customers, is aggressively vying for more. While the company owns 71% of the retail network, it has plans to increase it to 75% over the medium term.
It has a market share of 34% in the lubricants business and a 17% market share in industrial fuels segment.
It has 2 refineries, one at Mumbai and the other at Visakhapatnam, with a total capacity of 13 MTPA (million tonnes per annum). HPCL controls over 1,101 kms of product pipelines accounting for around 15 MTPA of petroleum products. To put things into perspective, it accounts for 29% of the product pipeline capacity. In the southern markets, it has an assured access to petroleum products from 9.7 MTPA MRPL refinery, in which it has equity stake of around 17%.
The expansion plans…
HPCL plans to set up a 9 MTPA refinery in the product deficit northern market. The estimated cost of the project is around 98 bn. However, the project shall be completed in phases. Initially, the refinery shall be set up with a capacity of 6 MTPA at a cost of Rs 83 bn and would be later extended to the targeted 9 MTPA. The company plans to complete the project by 2006. As of now, the company has a weaker presence in the northern market. Post the setting up of the plant, the company's market share is likely to increase and could translate into higher volume growth.
However, demand in the domestic market has to increase for the company to reap the benefits of expansion completely. Though exports are a possibility, it could have an impact on margins. We have exercise caution in our operating margins in the next two years owing to strengthening of crude prices and competition.
HPCL is set to enter the upstream segment of exploration and production of oil and natural gas. This backward integration shall help the company to curtail its dependence on external sources for the supply of crude to a great extent. Having said that, the risk profile of this diversification is on the higher side and it remains to seen how this new venture unfolds.
The stock currently trades at Rs 466 implying a P/E multiple of 8.6x annualised 9mFY04 earnings. The company posted a more than 50% growth in net profits for 9mFY04 largely due to the subsidy sharing agreement where ONGC and GAIL were roped into share the burden of cross-subsidies. Per se, demand for petro products like diesel have been weak and our interaction with the management in the past indicates that it is likely to remain so in the near future. While topline growth is a cause of concern, operating margins could come under pressure owing to the recent spurt in crude prices. With elections round the corner, politics will continue to dominate when it comes to pricing of diesel and petrol. These factors do make the stock risky in the medium term.
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