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HPCL: Other income aids bottomline - Views on News from Equitymaster

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HPCL: Other income aids bottomline
Jun 1, 2010

HPCL has announced its FY10 results. The company has reported a 13% YoY decline and 126% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline decreases by 13% YoY in FY10 due to lower realisations.
  • EBITDA margins expand from 2.6% in FY09 to 3.1% during the year.
  • Other income increases by 51% YoY during FY10.
  • Interest costs decline by 57% during the year.
  • Bottomline grows by 126% YoY despite the lower turnover due to higher operating margins and other income.
  • Board recommends a final dividend of Rs 12 per share.

Standalone financial snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 253,349 315,584 24.6% 1,251,378 1,084,977 -13.3%
Expenditure 197,140 300,074 52.2% 1,218,819 1,050,943 -13.8%
Operating profit (EBDITA) 56,209 15,510 -72.4% 32,559 34,034 4.5%
EBDITA margin (%) 22.2% 4.9%   2.6% 3.1%  
Other income 2,428 2,079 -14.4% 5,204 7,859 51.0%
Interest 3,779 1,640 -56.6% 20,828 9,038 -56.6%
Depreciation 2,545 3,175 24.8% 9,813 11,644 18.7%
Profit before tax 52,313 12,774 -75.6% 7,122 21,212 197.8%
Exceptional item (0) (37)   (0) (38)  
Tax 1,273 5,236 311.4% 1,373 8,237 500.1%
Profit after tax/(loss) 51,040 7,575 -85.2% 5,750 13,014 126.3%
Net profit margin (%) 20.1% 2.4%   0.5% 1.2%  
No. of shares (m)         339  
Diluted earnings per share (Rs)       38    
Price to earnings ratio (x)         10  

What has driven performance in FY10?
  • HPCL's average gross refining margin during FY10 was US$ 2.68 per barrel as compared to US$ 3.97 per barrel during FY09.

  • The company achieved a crude throughput of 15.76 m tonnes (MMT) during FY10 as opposed to 15.81 MT in FY09. It achieved market sales of 26.27 MMT in FY10 as opposed to 25.39 MMT during the previous year.

  • During 4QFY10, EBITDA margins contracted mainly on account of higher raw material costs which grew by 11.3% YoY (as a percentage of sales) during the quarter.

    Cost break-up
    (Rs m) 4QFY09 4QFY10 Change
    Raw materials 187,814 269,741 43.6%
    % sales 74.1% 85.5%  
    Staff cost (170) 5,342  
    % sales -0.1% 1.7%  
    Other expenditure 9,496 24,991 163.2%
    % sales 3.7% 7.9%  
    Total cost 197,140 300,074 52.2%
    % sales 77.8% 95.1%  

  • HPCL received subsidies on domestic LPG and Kerosene to the tune of Rs 6.1 bn during FY10, as compared to Rs 5.7 bn during FY09.

  • Upstream oil companies, i.e., ONGC and GAIL compensated for the under-recoveries of HPCL by providing discounts amounting to Rs 32.5 bn during FY10 (Rs 71.8 bn in FY09) on crude oil / LPG / kerosene purchased from them.

  • The government of India has confirmed a budgetary support of Rs 55.6 bn towards under- recoveries on sale of domestic LPG and Kerosene. HPCL had accounted for oil bonds received to the tune of Rs 146.9 bn in FY09.

  • Other income increased by 51% YoY during FY10 which aided the bottomline growth.

What to expect?
At the current price of Rs 369, the stock trades at a multiple of 7 times our estimated FY12 earnings. We continue to advise caution on the stock as interest costs 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.

Although there are positive noises from the government about deregulation of fuel prices, given their 'aam aadmi' mandate and the political opposition to such a move, it seems unlikely that a genuine structural change will actually be implemented.

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