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HPCL Vs BPCL - Views on News from Equitymaster
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  • Jul 2, 2003


    Indian oil industry comprises of companies in exploration, refining and marketing segments. In case of refining and marketing combine we have Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL). IOC stands as the market leader. While HPCL ranks second, BPCL is the number third in the same segment. In the current article we compare HPCL V/S BPCL, which have almost similar size of balance sheet and financials.

    Let's take look at the business profiles of these companies. BPCL has an 8.5 m tonne refinery in Mumbai region. It has about 4,711 retail outlets for marketing its petroleum products, out of which 68% are company owned. The company plans to increase the number of its retail outlets by about 1,000 in the current year. While it has a capacity of 8.5 m tonnes, its market sales of 19.9 m tonnes of petroleum products far exceed the refinery capacity. It has recently acquired management control in Kochi Refinery (7.5 m tonnes) and Numaligarh Refinery (3 m tonnes), taking its total effective capacity to 19 m tonnes. This has reduced its dependence on other refineries to source petroleum products. BPCL further plans to increase its refinery capacity by 3.5 m tonnes by the end of FY04.

    Business profile
    No. of retail outlets (FY02) 4,711 4,729
    Market sales (m tonnes) 19.9 18.9
    LPG distributors 1,729 1,822
    LPG customers (m) 15.3 16.0
    Gross refining margins (per barrel) US$ 3.7 US$ 3.7
    Capacity (m tonnes) 8.5 13.0

    As against this, HPCL has two refineries, one at Mumbai (5.5 m tonnes) and other at Visakh (7.5 m tonnes). The company operates a similar number of retail outlets (4,729) as compared to BPCL and owns 67% of those. It has initiated the activity to set up a grass root refinery of 9 m tonnes at Bhatinda by FY06. The customer base of HPCL for its LPG business exceeds that of BPCL by about 0.7 m. In FY03, though the refining margin of its Visakh refinery was higher as compared to BPCL's refinery, the overall gross refining margin was same at around US$ 3.7 per barrel.

    BPCL is known to have initiated the branding in commodities like petrol and diesel. In anticipation of the competition arising from entry of private players, BPCL started with the campaign of 'Pure for Sure', introduced premium petrol 'Speed' and was the first to launch a customer loyalty programme using the smart card. HPCL followed the suit and has also taken up steps to market the petroleum products.

    Now, we will take a look at some of the financial parameters.

    One to one
    Parameters BPCL HPCL
      FY02 FY03 FY02 FY03
    Operating ratios        
    Operating profit margin (%) 5.2% 5.5% 4.5% 5.9%
    Net profit margin (%) 2.4% 2.9% 2.0% 3.2%
    Return ratios        
    Avg. RONW (%) 21.0% 28.2% 12.7% 23.4%
    Avg. ROCE (%) 14.4% 18.1% 11.3% 17.2%

    In terms of operational efficiency, FY03 was a good year for HPCL. It scores higher as compared to BPCL. While the operating margins of HPCL improved by about 140 basis points that for BPCL increased marginally. This is because HPCL was able to increase its market sales at a higher rate of 4.9% as compared to BPCL's increase in market sales (3.9%). Also, throughput of BPCL's refinery declined 1% in FY03. Similarly, net profit margins of HPCL improved at higher rate as compared to that of BPCL. HPCL was able to reduce its interest outgo (down 48%) in FY03 by much higher rate as compared to its peer BPCL (down 20%).

    However, BPCL scores an edge over HPCL if one were to look at the return ratios. HPCL has always been behind BPCL in case of return ratios. However, in FY03, even though the return ratios are higher in case of BPCL, the YoY improvement for HPCL was much more as compared to BPCL. The case in point, in case of RONW, HPCL has seen a significant improvement of 1,070 basis points as compared to an incremental growth of 720 basis points for BPCL. Similarly in case of ROCE, HPCL has seen an improvement of 590 basis points compared to 370 basis points improvement for BPCL.

    In case of valuation parameters HPCL is valued at higher levels compared to BPCL. Both the companies are becoming increasingly competitive to gear up the competition in anticipation of the entry of private players in the marketing front. In fact, the face of the one time PSUs have drastically changed in the last couple of years.

    Valuation stats…
    Current price (Rs) 285 348
    P/E (x) 6.8 7.7
    Price/Book value (x) 1.8 1.6
    Market cap/sales (x) 0.2 0.2
    EV/EBDITA (x) 4.1 4.5

    So which one to choose? The valuation table above does not give much. HPCL's P/E is a shade higher than BPCL, but this seems more on account of its faster improvement in FY03 and the divestment prospects. So in that sense, HPCL has an edge over BPCL. But then, BPCL too is planning to list its stock on the US bourses, which too should unlock value for shareholders going forward. Refinery companies largely have a P/E band of 6x-9x. From future growth perspective both are trading near the lower end of this band.

    Currently, HPCL has a capacity of 13 m tonnes, while BPCL's consolidated capacity (Numaligarh and Kochi) will stand at 22.5 m tonnes by end of FY04. So on this basis, it is given that BPCL will score over HPCL in FY05 and FY06 in terms of topline growth, operating efficiency benefits and consequently bottomline growth. But the near term trigger of divestment is surely in favour of HPCL.



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