Must prove its strength... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Must prove its strength...

Apr 22, 2000

Not too many fund managers are looking at Hindustan Petroleum Corp. Ltd. (HPCL) these days. For that matter not too many fund managers are looking at refineries at all. So what does that mean for India's second largest integrated oil company? Read on to find out.

Only Indian Oil Company is larger than HPCL in the domestic integrated oil sector. It operates at a refining capacity of 10 million tonnes per annum and has a lube refinery with a manufacturing capacity of 330,000 tonnes per annum

HPCL's presence in the country is pervasive. It has over 4,300 petrol pumps, which constitutes close to 28 percent of total petrol pumps in the country. Moreover, it has more than 1,600 kerosene dealers, 9 aviation fuel stations and over 1,460 liquefied petroleum gas (LPG) distributors. A lot of credit for HPCL's impressive network can be attributed to the fact that it is government controlled and came on the scene long before the others. The company's expansive network ensures that it enjoys a competitive edge over rivals and new entrants. The latter have to establish a new network from scratch, which is expensive, and therefore have to enter into marketing tie-ups with the likes of HPCL and BPCL.

Not satisfied with its existing network, HPCL is constantly trying to devise ways to enhance its presence in the country. It was with this objective that the company spruced up its retail distribution network by adding convenient stores. Although the concept of convenience stores is in the nascent stages, over a period of time this could contribute significantly to the company's revenues.

While distribution is undoubtedly critical for HPCL, the company has not lost focus on enhancing its product range. It promoted Mangalore Refinery and Petrochemicals Ltd. (MRPL) in a venture with the Aditya Birla Group and owns 26 percent stake in the company. With this venture, HPCL has ensured that it receives a steady supply of petro products to services its retail outlets. As MRPL enhances its production capacity to 9 million tonnes per annum, HPCL will have large pool from where it can access products to handle its distribution requirements.

As the government looks at disinvestment seriously to shore up the fiscal deficit, HPCL and BPCL will be major beneficiaries. Reduction of the government's stake in HPCL (to below 51 percent) will free HPCL from many of the ills (read inefficiencies) that had afflicted the company in the past. Add to this the new management and the company's prospects could change significantly. HPCL has always been a sound company fundamentally. Its lagged behind the foreign oil majors in technology and work ethic. All this could change once a more experienced partner takes charge.

Margins under pressure...
(Rs m) 3QFY2000 3QFY1999 Change
Net Sales 92,727.9 62,270.4 48.9%
Other Income 207.7 313.8 -33.8%
Expenditure 88,898.4 58,237.2 52.6%
Interest 327.9 248.3 32.1%
Depreciation 1,089.8 962.2 13.3%
Profit before Tax 2,619.5 3,136.5 -16.5%
Tax 410.0 940.7 -56.4%
Profit after Tax/(Loss) 2,209.5 2,195.8 0.6%
Net profit margin (%) 2.4% 3.5%  

A question uppermost in the minds of most oil analysts is who is HPCL's suitor(s). No one may be ready to hazard a guess at this stage, but Reliance Petroleum and Royal Dutch Shell have evinced some interest in the company. Another possibility, which may turn out to become a reality, is a merger between BPCL and HPCL. This view gains further credence in the light of the agreement between the two oil companies to share terminals at two locations near Mumbai, in order to exploit synergies of operation. Earlier the Nitish Sengupta committee had actually recommended the merger of the two oil PSUs in order to compete more effectively under the deregulated era. However, then HPCL had opposed the recommendation of the committee.

However, all this talk of mergers cannot drive away the concerns that are inherent in the oil and gas sector. For one the margins in the refining sector are bound to be affected by the new capacities that will go onstream leading to a glut in the market. Dumping from foreign oil majors is another worry, although the government has tried to pacify domestic companies by providing protection in the form of higher duties. Moreover, petroleum product prices of a number of commodities are still regulated by the government, which stifles profitability. Another irritant for oil companies is their dependence on the Oil Coordination Committee for payments, which are more often than not delayed. This has an adverse impact on the cash flows of the company.

Given the concerns outlined above, it is not surprising to see why most fund managers give the oil sector a miss. Their obsession with software stocks has made them overlook the staid, unexciting refinery stocks. Consider this, HPCL over the past 12 months has grown only 11.9 percent, while the BSE Sensex in the same period has appreciated by over 40 percent.

However, clearly HPCL won't lose too much sleep over how fund managers perceive the stock. But competition in the refining sector is something that will give it some food for thought. As private (and efficient) players like Reliance Petroleum enter the market, HPCL's role could be reduced to that of a distributor with moderate refining prowess.

Equitymaster requests your view! Post a comment on "Must prove its strength...". Click here!


More Views on News

HPCL Announces Quarterly Results (3QFY20); Net Profit Up 201.8% (Quarterly Result Update)

Feb 7, 2020 | Updated on Feb 7, 2020

For the quarter ended December 2019, HPCL has posted a net profit of Rs 7 bn (up 201.8% YoY). Sales on the other hand came in at Rs 746 bn (down 3.4% YoY). Read on for a complete analysis of HPCL's quarterly results.

HPCL Announces Quarterly Results (2QFY20); Net Profit Down 3.6% (Quarterly Result Update)

Nov 12, 2019 | Updated on Nov 12, 2019

For the quarter ended September 2019, HPCL has posted a net profit of Rs 11 bn (down 3.6% YoY). Sales on the other hand came in at Rs 665 bn (down 9.4% YoY). Read on for a complete analysis of HPCL's quarterly results.

HPCL 2018-19 Annual Report Analysis (Annual Result Update)

Jul 30, 2019 | Updated on Jul 30, 2019

Here's an analysis of the annual report of HPCL for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of HPCL. Also includes updates on the valuation of HPCL.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 24, 2020 (Close)