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HPCL- Pros and Cons II - Views on News from Equitymaster

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HPCL- Pros and Cons II
Mar 25, 2008

In the previous article, we looked at some of the important factors working in favour of HPCL. We continue with our profile in this article. Pros

Visakh PCPIR: The government of Andhra Pradesh has nominated HPCL as an anchor company for development of petroleum, chemicals and petrochemicals investment region (PCPIR) in Visakh. The company is in talks with national and international companies for development of the PCPIR.

LPG Cavern: HPCL has set up a 60,000-MT LPG cavern storage facility in Visakh, in joint venture with TOTAL, France. The project is the first of its kind in South Asia and would enable meeting the growing demand of LPG in India and also the export of LPG to the deficit markets in South Asia / South East Asia.

Automation: HPCL has automated processes at many levels to increase efficiencies. The company has operationalised an Oracle based ERP system. It helps in tracking the cost of operations and there is an improvement in management control due to standardization of various business processes. Retail automation has been implemented to monitor the sales and stocks online and eliminates manual intervention. Electronic sealed parcel delivery system has been implemented to check fuel adulteration. As an added check, marker doping in Kerosene has also been commenced to curb kerosene adulteration in auto-fuels.

Diversification: HPCL has ventured into exploration & production as well as city gas distribution to access new revenue streams and even out variations in cash flows from downstream business. The company has participating interest in more than 20 blocks in India and overseas. It has also entered into a joint venture with GAIL for city gas distribution in Andhra Pradesh (Bhagyanagar Gas), Madhya Pradesh (Aavantika Gas) and Rajasthan.

Cons

Under recoveries: The net under recovery absorbed by HPCL on marketing of sensitive products during FY07 was about Rs 7.7 bn. The government continues to shield the consumer from high oil prices through a subsidy sharing mechanism involving downstream oil companies, the government and upstream oil companies. The problems are further compounded by the fact that stand-alone refineries did not offer any discounts on PDS Kerosene & Domestic LPG to PSU oil marketing companies (OMCs) in FY07.

Most of the private players have virtually exited the indigenous market. Infact, in the growing trend of export of petroleum products out of India (at around 20 MMT in FY07), PSU OMCs have lost out to the private sector refineries.

Marketing margins: HPCL’s marketing margins continue to be an area of concern. Crude oil prices continue to remain high and there appears to be no indication currently of a significant fall in the price in the near future.

Attrition: Contrary to the earlier trend of attrition at junior levels, HPCL is currently facing increasing attrition at the middle-management level. Replacing them requires at least 2 to 3 years of training to existing employees. The company is taking steps such as upgrading the skills of the employees through training and rotational assignments. On an average, 150 new officers are being recruited in the past few years to mitigate manpower crunch in future.

Misuse of subsidised LPG: Subsidised domestic LPG is misused for commercial purposes. It defeats the purpose of the subsidy and also mounts fiscal problem for the OMCs. In order to curb the misuse, the company has intensified controls and surveillance to ensure refill supplies to genuine customers including colour coding of domestic/non-domestic cylinders. Intensive efforts have been initiated in non-domestic segment. As a result, the non-domestic sector posted a growth of 62% in FY07.

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