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HPCL v/s BPCL: Relative standing (Part –I) - Views on News from Equitymaster
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HPCL v/s BPCL: Relative standing (Part –I)
Jul 17, 2006

Oil and gas industry is classified into two tiers i.e. upstream and downstream. Upstream activities includes exploration and production of crude oil, while the downstream activities includes refining and marketing activities. ONGC and Oil India are the public sector upstream majors in India, while IOC, HPCL and BPCL are the major downstream players in the country. In this write up, we will provide the investors with comparative overview of HPCL and BPCL. For the sake of better understanding, we have presented the comparison in the segmental business form i.e. refining and marketing

Analysis of the Refining business of both companies:
HPCL and BPCL are downstream refining and marketing companies in India. HPCL operates two refineries at Mumbai and Vizag. Mumbai refinery has a capacity of 5.5 million metric tonnes per annum (MMTPA) and Vizag refinery has a capacity of 7.5 MMTPA, forming a combined capacity of 13 MMTPA (roughly 10% of the country’s refining capacity). BPCL operates a refinery at Mumbai with a capacity of 12 MMTPA (roughly 9% of India’s refining capacity).

Capacity utilisation over the years…
Particulars FY01 FY02 FY03 FY04 FY05 FY06
Refining Capacity 13.0 6.9 13.0 6.9 13.0 6.9 13.0 6.9 13.0 6.9 13.0 12.0
Crude Thruput 12.0 8.7 12.3 8.7 12.9 8.7 13.7 8.7 13.9 9.1 13.8 10.3
Capacity utilisation 92% 126% 95% 127% 99% 127% 105% 126% 107% 133% 106% 86%

As is evident from the above table, robust economic growth has ensured that utilisation of capacity remains at higher levels for both the companies during the above-mentioned period. However, BPCL seems to have a slight edge over HPCL as the former’s utilisation remained well over 100% for all the years barring FY06. Drop in capacity utilisation for BPCL in FY06 could be attributed to a 74% increase in capacity during the said period.

Another important parameter for evaluation of any refining company is its GRMs (gross refining margins) which is nothing but the difference between the composite value of all products produced by the refinery minus the cost of crude. Table given below highlights the GRMs of HPCL and BPCL.

GRMs over the years…
Particulars FY01 FY02 FY03 FY04 FY05 FY06
HPCL:Mumbai N.A. 1.80 2.80 4.30 5.60 3.22
HPCL:Vishakh N.A. 1.70 4.40 4.60 5.06 2.56
HPCL 1.82 1.84 2.87 4.30 5.65 N.A.
BPCL 3.10 2.40 3.71 4.64 4.56 1.64
N.A= Not Available.

BPCL has performed better than HPCL in terms of GRMs. Its refinery has been able to produce greater proportion of light and middle distillates (motor spirit and diesel) and lesser proportion of heavy distillates (fuel oil, heavy oil, bitumen). In other words, BPCL’s refinery is more complex than HPCL It should be noted that light and middle distillates earn better margins as compared to their heavy counterparts. BPCL’s refining margins are lower in FY06 as it has reported its GRMs after adjusting for the under-recoveries.

Analysis of the Marketing business of both companies:
The other segment in which HPCL and BPCL have equally significant footing is the marketing of refined products. The arrival of private sector players (Reliance and Essar) has put the market share of BPCL and HPCL under pressure. The fall has been more pronounced in the case of HPCL as it has fallen by over 200 basis points since FY91. BPCL’s greater presence in urban cities has helped it prevent significant erosion in market share, as growth in product offtake has been higher here as compared to the rural areas. Furthermore, high entry barriers (shortage of favorable locations) has also meant that BPCL had to contend with less competition.

Market share and sales over the years…
Particulars FY91 FY00 FY01 FY02 FY03 FY04 FY05
Total sales 55.0 97.1 100.1 100.4 104.1 107.8 111.6
IOC 57.1 50.9 47.8 46.9 44.5 43.4 43.0
BPCL 18.9 19.5 19.4 19.0 19.1 18.8 18.5
HPCL 19.2 18.0 17.9 17.4 17.5 17.2 17.1
Other(PSUs) 4.8 5.0 4.8 5.4 5.5 6.1 6.2
Private parties Nil 6.6 10.1 11.3 13.4 14.5 15.2

BPCL seems to be scoring on the business mix front as well, since it does not have to rely on third party purchases as its refining capacity (after considering the fact that it owns two-standalone refining companies, Kochi Refineries and Numaligarh Refinery), is able to satiate the need of its marketing segment. HPCL on the other hand, has greater external dependence compared to that of BPCL, even after taking into account its 17% stake in MRPL. Furthermore, lower capacity utilisation for HPCL as compared to BPCL does not augur well for it

External dependency: HPCL v/s BPCL…
Particulars FY01 FY02 FY03 FY04 FY05
Sales Volumes 18.4 19.4 18.0 19.2 18.8 19.9 19.5 20.4 20.1 21.0
Refining Capacity 14.6 17.4 14.6 17.4 14.6 17.4 14.6 17.4 14.6 17.4
Sales Volumes/ refinery Capacity 126% 111% 123% 110% 129% 114% 133% 117% 137% 121%
Note: Refining capacity taken for above analysis includes subsidiary adjustment.

Future of the Refining segment of HPCL and BPCL:
BPCL has recently increased its refining capacity from 6.9 MMTPA to 12 MMTPA. This will further improve the business mix of the company. Also, the increased ability to handle sour crude is going to add to GRMs going forward. Company has also planned to establish green field refinery in Bina with a capacity of 6 MMTPA (Madhya Pradesh) thus giving it a foothold in the northern markets, which is facing a capacity shortage. This is going to have a positive impact on the company’s cost structure, as having a refinery in north India will reduce its transportation costs. HPCL is also embarking on a green field expansion by establishing a refinery at Bhatinda with a slated capacity of 9 MMTPA.

To sum up, the health of a company’s refining business can be gauged to a great extent by the GRMs of the company. While we are not saying that it the only tool, GRMs can go a long way in identifying a good refining company from the bad. If one were to apply this tool to the companies that we have discussed, BPCL has an edge over HPCL as its GRMs have been higher for the period under consideration.

Future of the Marketing segment of HPCL and BPCL:
While the marketing segment is currently reeling under the subsidy burden, in a normalized earning scenario, BPCL is likely to edge HPCL on account of its large presence in urban cities where not only higher growth but also higher sales of motor spirits exist. It should be noted that margins for motor spirit are higher in India as compared to other middle distillates like diesel. Having said that, both companies are gearing up to face competition and have launched branded fuels and other initiatives such as brand loyalty programs and providing one-stop service facilities at its outlets.

In this article, we have focused exclusively on the refining and marketing business of the both the companies. We have not delved into financial analysis of both the companies. Also, we have refrained from relative valuation of both the companies. In the next article, we will be presenting the financial performance of both the companies.

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