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HPCL: In troubled waters - Views on News from Equitymaster

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HPCL: In troubled waters
May 29, 2008

Performance summary
  • Topline increases by 18% YoY in FY08 on the back of a 13% increase in market sales.
  • EBITDA margins contract to 1.5%, from 2.7% in FY07 due a 19% YoY rise in expenditure and due to increased under recoveries.

  • Other income rises by 75% YoY during the fiscal.

  • Bottomline has declined by 28% owing to erosion in operating margin and higher interest costs.

  • Topline grows 44% YoY, while bottomline declines 30% YoY in 4QFY08.

Standalone financial snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 218,495 314,706 44.0% 890,413 1,047,038 17.6%
Expenditure 208,244 312,538 50.1% 866,316 1,031,498 19.1%
Operating profit (EBDITA) 10,251 2,168 -78.8% 24,096 15,540 -35.5%
EBDITA margin (%) 4.7% 0.7%   2.7% 1.5%  
Other income 1,964 3,177 61.7% 6,845 11,980 75.0%
Interest 1,527 3,009 97.0% 4,230 7,925 87.4%
Depreciation 1,864 2,532 35.8% 7,040 8,508 20.9%
Profit before tax 8,824 (196) -102.2% 19,672 11,087 -43.6%
Tax 3,329 (4,041)   3,960 (262)  
Profit after tax/(loss) 5,495 3,845 -30.0% 15,712 11,349 -27.8%
Net profit margin (%) 2.5% 1.2%   1.8% 1.1%  
No. of shares (m)       339.4 339.4  
Diluted earnings per share (Rs)         33.44  
Price to earnings ratio (x)         7.46  

What has driven performance in FY08?
  • HPCL’s topline increased by 18% YoY in FY08 on the back of a 12.8% increase in market sales from 21.69 MT in FY07 to 24.46 MT in FY08. Crude thruput increased marginally from 16.7 MT in FY07 to 16.8 MT in FY08.

  • The company recorded GRMs of US$ 5.98 per barrel in FY08 for the Mumbai refinery (US$ 4.78 per barrel in FY07) and US$ 6.98 per barrel in FY08 for the Visakh refinery (US$ 3.51 per barrel in FY07).

  • The company’s bottom line during FY08 has been adversely affected due to high crude prices and product prices, which could not be fully passed on to the consumers. The under recovery during FY08 was partially compensated by discounts from ONGC and GAIL to the tune of Rs 54 bn (FY07 42 bn) and Oil bonds from the central government to the tune of Rs 77 bn (FY07 Rs 50 bn).

  • The prices of domestic LPG and Kerosene continue to be subsidized. Subsidy to the tune of Rs 5.6 bn (Rs 5.4 bn in FY07) has been accounted for by the company. It amounts to 1/3rd of the under recoveries on these products sold by the company.

    Cost break-up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 195,727 295,471 51.0% 824,235 978,747 18.7%
    % sales 89.6% 93.9%   92.6% 93.5%  
    Staff cost 1,619 2,631 62.6% 7,294 8,677 19.0%
    % sales 0.7% 0.8%   0.8% 0.8%  
    Other expenditure 10,899 14,436 32.5% 34,788 44,074 26.7%
    % sales 5.0% 4.6%   3.9% 4.2%  
    Total cost 208,244 312,538 50.1% 866,316 1,031,498 19.1%
    % sales 95.3% 99.3%   97.3% 98.5%  

  • The cost structure for the company worsened during the year, as raw materials- the most important component- increased from 92.6% to 93.5% (as percentage of sales). The extreme sensitivity of the company’s performance to the movement in raw material (crude) prices makes it a risky bet.

What to expect?
At the current prices of Rs 250, the stock trades at price to earnings ratio of 7.4 times its standalone FY08 earnings. We advise caution at this juncture as high crude prices and regulatory concerns will continue to impact the short-term performance of the company, while poor return on incremental capital expenditure will impact the long term performance of the company. We shall soon update our research report on the company.

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