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Other income saves HPCL - Views on News from Equitymaster
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  • May 25, 2001

    Other income saves HPCL

    The refining & marketing major, Hindustan Petroleum Corporation Ltd. (HPCL), has reported a strong topline growth of 43.6% for the fiscal ended March '01. However, sales growth in 4QFY01 is lower compared to the earlier quarters and has been declining in each quarter since start of the fiscal. The turnover growth for 9m FY01 was 54.2%.

    (Rs m) 4QFY00 4QFY01 Change FY00 FY01 Change
    Sales 106,577 125,648 17.9% 338,309 485,668 43.6%
    Other Income 600 2,919 386.5% 1,268 4,645 266.3%
    Expenditure 102,467 122,746 19.8% 322,307 468,904 45.5%
    Operating Profit (EBDIT) 4,110 2,901 -29.4% 16,002 16,764 4.8%
    Operating Profit Margin (%) 3.9% 2.3%   4.7% 3.5%  
    Interest 691 975 41.1% 1,504 3,873 157.5%
    Depreciation 863 1,158 34.2% 3,030 4,334 43.0%
    Profit before Tax 3,156 3,687 16.8% 12,736 13,202 3.7%
    Tax 472 422 -10.6% 2,162 2,322 7.4%
    Profit after Tax/(Loss) 2,684 3,265 21.6% 10,574 10,880 2.9%
    Net profit margin (%) 2.5% 2.6%   3.1% 2.2%  
    No. of Shares (eoy) 339 339   339 339  
    Diluted Earnings per share* 31.7 38.6   31.2 32.1  
    P/E Ratio   4.3     5.1  

    In FY00, HPCL augmented the refining capacity at Visakh by 2.5 MMTPA to 7.5 MMTPA. The higher turnover growth in the earlier quarters of the current fiscal could be due to the augmented capacity coming onstream in the latter half of FY00. Consequently, the benefit of higher volumes could be negated in 4QFY01. The increase in sales for FY01 could also have been facilitated by higher realisations with petroleum prices hiked by the Government towards the end of 2QFY01. Products purchased for resale have grown by 36% YoY in value terms.

    Although sales growth has been impressive the operating expenditure for 4Q and FY01 has risen at a faster clip. The crude oil shock with prices rising from $16 / barrel to $30 / barrel has resulted in raw material costs increasing by 56% YoY. Meanwhile staff cost have grown 30% for the year. Consequently, the operating profit margin has come under pressure leading to operating profits registering a modest growth in FY01.The OPM declined by 120 basis points for the year.

    In 4QFY01, the OPM registered an even larger decline of 160 basis points YoY, which led to the operating profits recording negative growth of 29%. Oil prices did cool down during 4QFY01 from the highs seen in the preceding quarter. Oil prices declined from $35 / barrel to $26 / barrel during this period. However, operating margins, that rose QoQ for the first three quarters, declined by 200 basis points in 4Q over 3QFY01. It seems operating costs have remained out of control leading to a fall in margins.

    Interest expenses have recorded a significant jump of 158% in FY01. This could be mainly due to the company's funds being blocked in the oil pool account. Consequently, HPCL may have resorted to short term borrowings to meet its working capital requirements. The oil pool account closed FY01 with an estimated deficit of Rs 120 bn. Although rising appreciably in 4QFY01, the interest expense, in absolute terms, has declined compared to the preceding two quarters. The drop in YoY change for 4Q is also due to the predicament of higher interest expense starting in 4QFY00.

    The depreciation charge has also increased significantly during the year. The company commissioned the diesel hydro-desulphurisation (DHDS) plant at both Mumbai and Viaskh in FY00, which has added to the depreciation costs. The company incurred a cost of Rs 7.6 bn for the Mumbai project and is likely to have incurred a similar cost at Visakh. The plant is used for reducing the sulphur content in diesel from an estimated 1% to 0.3% and was required to be set up under the new environmental norms.

    The tax liability and effective tax rate (60 basis points) has increased marginally for the year. However, the effective tax rate for 4QFY01 has declined by 360 basis points to 11.4%.

    Pre-tax profits and post tax profits have been rescued by other income, which has increased substantially YoY. Most of the other income has been recorded in 4Q (63% of full year figure). Other income for 9m FY01 stood at Rs 1,726 m. Removing other income from the income statement the PAT would have dropped by 33% YoY. We had estimated the PAT to decline by 4.3% in FY01.

    At Rs 164 the company trades on a multiple of 5.1x FY01 earnings. The valuations of the company have improved over the year from 3.9x 2QFY01 annualised earnings and 4.4x 3QFY01 annualised earnings. The three year average multiple for the company is 12.8x. However, this could be due to the markets anticipating an improvement in the disinvestment prospects.



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