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HPCL: Fuel reforms boost performance - Views on News from Equitymaster
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HPCL: Fuel reforms boost performance
Jun 26, 2015

Hindustan Petroleum Corporation Ltd (HPCL) has announced the results for the quarter ended March 2015. The company has reported 30.6% YoY decline in the topline while bottomline for the quarter declined by 53% YoY. Here is our analysis of the results.

Performance summary
  • For the quarter, sales were down 30.5% YoY. For FY15, the topline declined by 7.5% YoY.
  • The operating profit for the quarter declined by 40.8% YoY, with margins at 7.9%, down from 9.2% in 4QFY14. For FY15, the operating profit grew by 9.8% YoY, with margins at 2.7%, up from 2.3% in FY14.
  • The company reported a decline of 53.1% in the net profit for the quarter. For FY15, the bottomline grew by 57.6% YoY.
  • The Board has recommended a final dividend of Rs 24.5 per share, implying a dividend yield of 3.0%.
  • For the quarter, the average gross refining margin (GRM) stood at US$ 7.5 per barrel versus US$ 4.7 per barrel in the corresponding quarter last year. For FY15, the GRM stood at US$ 2.84 per barrel versus US$ 3.43 per barrel last year.
  • The company has accounted for a budgetary support of Rs 50.6 bn for FY15 (down 66.8%) from the Government against under recoveries on sale of sensitive petroleum products in FY15.
  • For FY15, the discount from upstream companies stood at Rs 109 bn, down 35.2%
  • The crude throughput for the quarter stood at 4.45 million tonnes (MT), versus 4.34 MT in 4QFY14. For FY15, the crude thruput stood at 16.18 MT vs. 15.51 MT in FY14. .
  • The market sales (including exports) for the quarter came in at 8.19 MT, versus 8.04 MT in 4QFY14. For FY15, the market sales (including exports) stood at 31.95 MT, up 3.2% YoY.

Financial summary
Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Total Operating revenues 642,473 446,155 -30.6% 2,233,515 2,066,262 -7.5%
Expenditure 583,113 411,014 -29.5% 2,181,929 2,009,627 -7.9%
Operating profit (EBDITA) 59,360 35,142 -40.8% 51,586 56,635 9.8%
EBDITA margin (%) 9.2% 7.9%   2.3% 2.7%  
Other income 3,330 4,778 43.5% 9,817 11,684 19.0%
Interest 1,986 1,532 -22.9% 13,364 7,066 -47.1%
Depreciation 5,793 5,549 -4.2% 21,884 19,712 -9.9%
Profit before tax before exceptional items 54,910 32,839 -40.2% 26,155 41,541 58.8%
Profit before tax margin (%) 8.5% 7.4%   1.2% 2.0%  
Tax 8,817 11,215 27.2% 8,817 14,209 61.1%
Effective tax rate (%) 16.1% 34.2%   33.7% 34.2%  
Profit after tax/(loss) 46,092 21,624 -53.1% 17,338 27,333 57.6%
Net profit margin (%) 7.2% 4.8%   0.8% 1.3%  
No. of shares (m)         339  
Diluted earnings per share (Rs)*         80.7  
P/E ratio(x)*         9.1  
*On the basis of trailing 12 months

What has driven performance in 4QFY15?
  • The topline for the quarter declined by around 31% YoY on account of lower realizations in a weak crude price scenario.

  • The company witnessed a significant improvement in the gross refining margins (GRMs) for the quarter. The GRM for the quarter stood at US$ 7.5 per barrel. This compares to a negative GRM in the preceding quarter. The company did not bear any under recovery burden as the same was fully reimbursed by upstream sector.

  • For the year, the operating profit margin improved to 2.7% from 2.3% last year on account of superior marketing performance.

  • For the quarter, the bottomline declined by 53% YoY. However, the numbers are not comparable as the company received a subsidy of Rs 34 bn in 4QFY14 relating to earlier quarters (without which the year on year growth in bottomline could be around 58% YoY). The interest expense declined by around 23% YoY for the quarter on account of lower under recoveries. Other income for the quarter grew by 43.5% YoY.

  • For the year, higher market sales, superior marketing performance and decline in interest expense led to around 58% YoY growth at the bottomline level. The consolidated profit was lower than stand alone profit as the company incurred losses on HMEL.

    Cost breakup
    (Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
    Raw materials 552,657 375,507 -32.1% 2,065,260 1,891,862 -8.4%
    % sales 86.0% 84.2%   92.5% 91.6%  
    Staff cost 4,660 6,080 30.5% 20,303 24,147 18.9%
    % sales 0.7% 1.4%   0.9% 1.2%  
    Other expenditure 25,796 29,426 14.1% 96,366 93,618 -2.9%
    % sales 4.0% 6.6%   4.3% 4.5%  
    Total costs 583,113 411,014 -29.5% 2,181,929 2,009,627 -7.9%
    % sales 90.8% 92.1%   97.7% 97.3%  
What to expect?
The company's results for the quarter are not comparable on account of under recoveries, exchange rate fluctuations and inventory losses. Overall, diesel deregulation has helped in better working capital management and lower interest costs. The company is one of the biggest beneficiaries of the fuel reforms. Going forward, the refining margins that were seen for the quarter are not likely to be sustained. Further, there is a risk of private players become aggressive in oil marketing space.

With fuel reforms, the profile of oil marketing companies seems better - with debt and working capital demands moderating and better earning predictability. The total debt (standalone basis) at the end of the year stood at around Rs 171 bn. While it has come down by 47% YoY, it still remains beyond our comfort zone. On a consolidated basis, the ratio is even higher.

From valuations perspective, the stock is trading at trailing 12 months price to earnings ratio of 9.1 times (standalone basis) and price to book value of around 1.4 times. At current price, we believe that the stock does not offer enough margin of safety. As such, we recommend investors to avoid buying the stock. We are in the process of revising our estimates for HPCL and will come up with a revised target price soon.

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