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BPCL versus HPCL: Which is better?

Mar 28, 2012

Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) are two of the biggest players in state run oil refining industry. Both the companies are operating under a scenario where the Government policies (regulated petroleum product prices and adhoc subsidy allocation) override the fundamentals. We all know that due to a regulated petroleum product price environment and high costs of crude, these companies incur revenue losses on the sales of regulated petroleum products. However, the Government at the end of year compensates these companies so as to keep their bottomline in black. There are no fixed criteria, timing or formula for such compensation, making it difficult for anyone to estimate financial performance of these companies.

Yet, if one takes a look at the current market valuations and stock price trend, the stock price of BPCL is trading at a premium to HPCL


So what is driving BPCL's valuations higher? More importantly, is this premium justified? We will find out in the following series of articles. But let's start with the basics the company profiles.

Both the companies are primarily in the business of refining crude, production and marketing of resultant petroleum products. The following table highlights how companies fare on the key operational parameters.

Operational Parameters BPCL HPCL
Refining Capacities (MMT) 21.50 14.80
Crude thruputs (MMT) 24.03 14.75
Market Sales including exports(MMT) 32.19 27.03
Domestic market sales (MMT) 29.58 25.50
Gross refining margins (US$ per barrel) 4.47 5.30
Retail outlets 9,290 10,212
Market Share in Refining capacity (incl private players) 13% 8%
Domestic Sales of Petroleum Products market share (%) 24% 22%
Exploration and Production blocks 27 25
*refers to capacities of just Mumbai and Kochi refineries and excludes Bina refinery and Numaligarh refinery.
Similarly, HPCL's capacities reflect Mumbai and Vizag refineries and excludes MRPL and Bhatinda refineries

The 'retail' sensitivity

As seen from the chart below, HPCL has got retail products sales as a higher percentage of the overall market sales. Since the prices of key retail products are regulated in India, HPCL is more sensitive to the factors that can lead to increase in under recoveries. This means HPCL will be more affected (negatively) on account of factors such as high crude prices and depreciating rupee or delay in compensation. Having said that, the upside will be better for HPCL than for BPCL. For example, if there is any increase in petroleum product prices, it should be more positive for HPCL (keeping other factors constant).

'Self sufficiency' in generating sales

As we can see from the chart, when it comes to self reliance in sales generation, BPCL fares better. This is because BPCL on account of its higher refining capacity relies less on other companies (indicated by Products purchased for resales). In terms of volumes, while BPCL has around 47% of its sales generation through products purchased and resold, HPCL relies on other companies' products to the extent of 61%.

The 'extra' edge

As we have mentioned before, fundamentals are hardly reflected in the financials of these companies and ultimately it all boils down to subsidy receipts that these companies receive from the Government or the upstream sector. But that is true for refining business.

Apart from that, the companies have been trying to diversify by entering businesses across and along the vertical chain. For example, these companies have shown interest in City Gas distribution business and invested significantly in Exploration and Production business. It is in this regard that we believe that BPCL beats HPCL hands down .While HPCL has shown no significant discoveries despite considerable investment in Exploration and Production assets, BPCL has made its mark and accreted significant value from its share of reserves in gas resources in Brazil and Mozambique.

Hence, as discussed above, BPCL emerges to be more self reliant, less sensitive to external factors and better diversified along the value chain as compared to HPCL. In the next article, we will compare the companies on further parameters and financials.

Richa Agarwal

Richa Agarwal (Research Analyst), Managing Editor, Hidden Treasure has over 7 years of experience as an equity research analyst. She routinely scours the small cap universe for fundamentally strong companies trading at attractive prices. Having degrees in both finance as well as engineering has served her well in analysing business models across the small cap space.


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1 Responses to "BPCL versus HPCL: Which is better?"

Saurav

Mar 28, 2012

Excellent report! Cant wait for the next article. May I ask to elaborate on self sufficiency in generating sales though?

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Equitymaster requests your view! Post a comment on "BPCL versus HPCL: Which is better?". Click here!

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