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HPCL: 'Refine'd growth - Views on News from Equitymaster
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  • Jun 27, 2003

    HPCL: 'Refine'd growth

    India's second largest oil refining and marketing major, Hindustan Petroleum Corporation Limited (HPCL), announced its financial results today. APM dismantling came as cheers for oil PSUs and helped them post very good results during the first year of dismantling. HPCL was no exception and it also performed in line with performance of its peers. Let's take a detailed look at its performance.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net sales 96,305 136,968 42.2% 396,335 484,592 22.3%
    Other Income 833 658 -21.0% 2,750 2,859 4.0%
    Expenditure 88,311 125,928 42.6% 378,618 456,061 20.5%
    Operating Profit (EBDIT) 7,994 11,040 38.1% 17,717 28,532 61.0%
    Operating Profit Margin (%) 8.3% 8.1%   4.5% 5.9%  
    Interest 705 281 -60.1% 2,947 1,530 -48.1%
    Depreciation 1,573 1,562 -0.7% 5,295 5,743 8.5%
    Profit before Tax 6,549 9,855 50.5% 12,225 24,118 97.3%
    Tax 2,300 3,514 52.8% 4,345 8,744 101.2%
    Profit after Tax/(Loss) 4,249 6,341 49.2% 7,880 15,374 95.1%
    Net profit margin (%) 4.4% 4.6%   2.0% 3.2%  
    No. of Shares 338.8 338.8   338.8 338.8  
    Diluted Earnings per share* 50.2 74.9   23.3 45.4  
    P/E Ratio         7.8  

    In FY03, the crude prices strengthened and rose by about 45% YoY. As a result of dismantling, oil PSUs got the rights to align the prices of petroleum products with international prices of crude oil. Consequently, petroleum product prices also increased in tandem and this helped the company clock a strong 22% topline growth. This apart, increase in volumes and high level of inventory further added to the topline growth.

    The key positive for HPCL was that its petroleum products volume sales (up 5% YoY) beat the industry sales growth of 1% by a wide margin. This increase in volumes was mainly because of increase in sales of LPG (11%), diesel (2%), petrol (9%), naphtha (12%) and lubricants (28%). However, kerosene sales of the company experienced a negative growth of about 5%. But this is again a sign of India's developing market for petro-products. The shift to value add fuels is on the rise.

    Expenses of the company also increased on account of increase in crude oil prices. Raw material (crude oil) cost as a percent of net sales increased from 28% to 32% during FY03. Increase in cost of products for resale also added to the increase in expenses. However, HPCL's topline increased at a faster clip than expenses. Also, gross refining margins (GRM) of both its refineries increased during the year. While, GRM for Mumbai refinery increased from US$ 1.8 per barrel to US$ 2.8 per barrel, the same for Visakh refinery increased at an even higher pace (from US$ 1.7 per barrel to US$ 4.4 per barrel). As a result of this, the operating margins of the company increased by 140 basis points.

    In addition to the increase in topline and higher GRM, HPCL was successful to reduce its interest outgo by about 48% by taking advantages of the prevailing lower interest rates. This alone added about 9% to the bottomline. However, increase in the crude oil prices during the fourth quarter resulted in lower growth in bottomline as compared to the second and the third quarter.

    What is encouraging is that HPCL managed to beat its peer, BPCL, on efficiency front in FY03. While both companies finished FY03 with an almost identical 22% topline growth, HPCL's operating margin improvement to 5.9% in FY03, outclassed BPCL's 5.6%. Also, HPCL was far more aggressive in reducing its interest outgo during the year. While BPCL managed to reduce its debt servicing cost by a healthy 20%, HPCL's debt restructuring saw the company reduce its interest burden by a hefty 48%. Consequently, BPCL finished FY03 with a much lower 47% net profit growth.

    At Rs 347, the stock is trading at a P/E multiple of 7.6x its FY03 earnings multiple. The company's historical P/E band is 5x - 10x. HPCL has announced a final dividend of about 180% for the year ended FY03. It has initiated activities to set up a grass root refinery at Bhatinda having a capacity of about 9 MMTPA. This is expected to be complete by FY06. This will increase the refining capacity of the company and reduce dependence on other players for supplies of petroleum products to retail outlets.

    Though the reduction in industrial activity and reduced demand for the petroleum products during the first quarter of FY04 is a concern, we believe that the long term prospects of the company are encouraging, aided largely by the keenness of the government to find a strategic stakeholder for the company by the end of FY04.



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