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HPCL: Margins turn around on lower crude - Views on News from Equitymaster
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HPCL: Margins turn around on lower crude
Jun 20, 2009

Performance summary
  • Topline increases by 20% YoY in FY09.
  • EBITDA margins improve during the year to 2.6%, up from 1.5% in FY08.
  • Other income declines by 57% YoY during the fiscal.
  • Interest costs zoom 163%, denting the profit before tax.
  • For 4QFY09, the topline declines by 19%, while the bottomline swells on improved margins.


Standalone financial snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 314,706 253,637 -19.4% 1,047,038 1,251,379 19.5%
Expenditure 312,538 197,168 -36.9% 1,031,498 1,218,818 18.2%
Operating profit (EBDITA) 2,168 56,470   15,540 32,561 109.5%
EBDITA margin (%) 0.7% 22.3%   1.5% 2.6%  
Other income 3,177 2,167 -31.8% 11,980 5,202 -56.6%
Interest 3,009 3,779 25.6% 7,925 20,828 162.8%
Depreciation 2,532 2,545 0.5% 8,508 9,813 15.3%
Profit before tax (196) 52,313   11,087 7,122 -35.8%
Tax (4,041) 1,273   (262) 1,373  
Profit after tax/(loss) 3,845 51,040   11,349 5,750 -49.3%
Net profit margin (%) 1.2% 20.1%   1.1% 0.5%  
No. of shares (m)         339  
Diluted earnings per share (Rs)         17  
Price to earnings ratio (x)         18  

What has driven performance in FY09?
  • HPCL’s average gross refining margin during FY09 was US$ 3.97 per barrel as compared to US$ 6.54 per barrel during FY08. Refining margin during the fiscal was lower on account of the decline in the global crude oil prices, which resulted in inventory losses.

  • HPCL’s financial results for FY09 have been adversely affected due to under recoveries on product prices, which could not be fully passed on to the consumers. Subsidies on domestic LPG and Kerosene to the tune of Rs 5.7 bn have been accounted by the company during the fiscal, as compared to Rs 5.6 bn during FY08.

  • Upstream oil companies, i.e. ONGC and GAIL partially compensated for the under recoveries by providing discounts amounting to Rs 71.8 bn (Rs 54.1 bn in FY08) on crude oil / LPG / kerosene purchased from them. The Government of India also compensated by issuing oil bonds from to the tune of Rs 146.9 bn (Rs 77 bn in FY08).

  • HPCL has changed its accounting policy for recognition of exchange differences arising on long term foreign currency monetary items under AS-17. So far, they were charged to the profit and loss account. As a result of this change, profit for FY09 has increased by Rs 2 bn.

  • Raw material costs (as a % of sales) declined substantially during 4QFY09 as compared to 4QFY08 due the steep decline in crude prices from their all time highs.

  • HPCL’s interest cost during FY09 zoomed 163% as the company had to resort to borrowings when internal accruals dried up in the first half of the fiscal.

What to expect?
At the current prices of Rs 302, the stock trades at price to earnings ratio of 18 times its FY09 standalone earnings. We continue to hold a negative view on the stock as the rupee dollar exchange rate, a heavy debt burden and persisting structural problems 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. Moreover, given their ‘aam admi’ mandate, the government seems unlikely to bite the bullet when it comes to genuine deregulation of fuel prices.

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