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HPCL : Bottomline up 92%

Jun 18, 2014

Hindustan Petroleum Corporation Ltd (HPCL) has announced the results for the quarter and year ended March 2014. For FY14, the company has reported 8.0% year on year (YoY) growth in sales and 92% YoY growth in the net profits. Here is our analysis of the results.

Performance summary
  • For the quarter, sales were up 7.6% YoY. For FY14, HPCL reported 8.0% YoY growth in the revenues.
  • The operating profit for the quarter declined by 30.3% YoY due to overall increase in operating costs, with margins at 9.3% versus 14.3% in 4QFY13. For FY14, operating profits grew by 38.9% YoY, with margins at 2.3%, up from 1.8% in FY13.
  • The net profits for the quarter declined by 40% YoY, with net profit margin at 7.2%, down 5.7% YoY. For FY14, the net profit grew by 91.6% YoY, with net profit margin at 0.8%, up 0.3% YoY. The consolidated net profit for FY14 stood at Rs 10.8 bn (lower than standalone) mainly due to losses from Bhatinda refinery.
  • The average gross refining margins (GRMs) for the year stood at US$ 3.43 per barrel, up from US$ 2.08 per barrel in FY13.
  • For FY14, HPCL received budgetary support of Rs 152 bn. The compensation from upstream segment for fuel under recoveries stood at Rs 168 bn, up 49.9% YoY.
  • The crude throughput for the quarter stood at 4.34 million tonnes (MT), up 0.5% YoY (up 13% QoQ). For FY14, the thruput came in at 15.5 MT, down 1.7 % YoY.
  • The market sales for the quarter came in at 8.04 MT, up 3.7% YoY. For FY14, the market sales stood at 30.96 MMT, up 2.1% YoY.
  • The company has recommended a final dividend of Rs 15.5 per share, implying a dividend yield of 3.8%

(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 596,809 641,923 7.6% 2,067,222 2,232,713 8.0%
Expenditure 511,620 582,538 13.9% 2,030,028 2,181,055 7.4%
Operating profit (EBDITA) 85,189 59,385 -30.3% 37,194 51,659 38.9%
EBDITA margin (%) 14.3% 9.3% -5.0% 1.8% 2.3% 0.5%
Other income 3,910 3,303 -15.5% 11,024 9,745 -11.6%
Interest 1,694 1,985 17.2% 14,128 13,364 -5.4%
Depreciation 4,914 5,793 17.9% 19,344 21,884 13.1%
Profit before tax before exceptional items 82,492 54,910 -33.4% 14,746 26,155 77.4%
Profit before tax margin (%) 13.8% 8.6% -5.3% 0.7% 1.2% 0.5%
Tax 5,699 8,817 54.7% 5,699 8,817 54.7%
Profit after tax/(loss) 76,793 46,092 -40.0% 9,047 17,338 91.6%
Net profit margin (%) 12.9% 7.2% -5.7% 0.4% 0.8% 0.3%
No. of shares (m)         339  
Diluted earnings per share (Rs)*         51.2  
P/E ratio(x)**         7.8  
*On a trailing 12 months basis

What has driven performance in FY14?
  • The revenues during the year were up by 8.0% YoY on the back of higher product sales and higher gross refining margins.

  • The company reported operating margin of 2.3% for the year, as compared to 1.8% in FY13. This was mainly on account of lower employee costs and raw material costs (both as a % of sales).

    Cost breakup
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Raw materials 492,831 552,703 12.1% 1,921,560 2,065,260 7.5%
    % sales 82.6% 86.1%   93.0% 92.5%  
    Staff cost 3,653 4,660 27.6% 25,256 20,303 -19.6%
    % sales 0.6% 0.7%   1.2% 0.9%  
    Other expenditure 15,135 25,175 66.3% 83,212 95,492 14.8%
    % sales 2.5% 3.9%   4.0% 4.3%  
    Total costs 511,620 582,538 13.9% 2,030,028 2,181,055 7.4%
    % sales 85.7% 90.7%   98.2% 97.7%  

  • The net profit for the year grew by 92% YoY on the back of higher refining margins and lower under recoveries . Also, the lower interest costs (down 5.4% YoY) boosted the growth in the net profits. However, it was slightly offset by lower other income and increase in depreciation expenses. The net under recovery burden for HPCL stood at Rs 4.8 bn.
What to expect?
The scenario for oil marketing companies look better with regards to under recovery compensation and on account of phased diesel deregulation. However, the state run companies may face tough competition with private ones once diesel prices get fully controlled. In the short term, the crisis in Iraq and its impact on oil prices and rupee may be a cause of concern for these companies.

The stock price of HPCL has seen a run up recently (76% up in the year till date) and stock is currently trading at a PE of around 8 times. While the company is planning capacity expansion, the return ratios remain low and debt levels are higher than our comfort level.

We recommend investors not to buy the stock at current prices. We are in the process of revising our estimates and will soon update investors with the target prices.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation that no single stock comprises more than 5% of your portfolio.

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