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HPCL: Underrecoveries still hurt - Views on News from Equitymaster
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HPCL: Underrecoveries still hurt
Jul 26, 2010

HPCL has announced its 1QFY11 results. The company has reported a 20% YoY growth in sales and a negative bottom line. Here is our analysis of the results.

Performance summary
  • Topline increases by 20% YoY in 1QFY11 due to higher prices.
  • EBITDA margin turns negative during the period from 5.4% in 1QFY10 on the back of under recoveries on sensitive petroleum products.
  • Other income decreases by 18.1% YoY during 1QFY11.
  • Interest costs decline by 27% during the quarter.
  • Bottomline turns negative despite the higher turnover due to negative operating margins.


Standalone financial snapshot
(Rs m) 1QFY10 1QFY11 Change
Net sales 244,362 293,015 19.9%
Expenditure 231,100 308,354 33.4%
Operating profit (EBDITA) 13,262 (15,339)  
EBDITA margin (%) 5.4% -5.2%  
Other income 2,018 1,653 -18.1%
Interest 2,702 1,968 -27.2%
Depreciation 2,629 3,174 20.8%
Profit before tax 9,948 (18,829)  
Exceptional item -   (14)  
Tax 3,457 -    
Profit after tax/(loss) 6,491 (18,843)  
Net profit margin (%) 2.7% -6.4%  
No. of shares (m)   339  
Diluted earnings per share (Rs)*   (36.4)  
*On trailing twelve months earnings

What has driven performance in 1QFY11?
  • HPCL’s average gross refining margin during 1QFY11 was US$ 3.72 per barrel as compared to US$ 5.71 per barrel during 1QFY10.

  • The company achieved a crude throughput of 3.29 m tonnes (MT) during 1QFY11 as opposed to 4.1 MT in 1QFY10. It achieved market sales of 6.73 MT in 1QFY11 as opposed to 6.84 MT during the same quarter in the previous year.

  • During 1QFY11, EBITDA margins turned negative mainly on account of higher raw material costs which grew by 13% YoY (as a percentage of sales).

    Cost break-up
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 215,097 295,367 37.3%
    % sales 88.0% 100.8%  
    Staff cost 6,057 3,662 -39.5%
    % sales 2.5% 1.2%  
    Other expenditure 9,946 9,325 -6.2%
    % sales 4.1% 3.2%  
    Total cost 231,100 308,354 33.4%
    % sales 94.6% 105.2%  

  • HPCL has accounted for subsidies on domestic LPG and Kerosene to the tune of Rs 1.5 bn during 1QFY11, as compared to Rs 1.4 bn during 1QFY10.

  • Upstream oil companies, i.e., ONGC and GAIL compensated for the under-recoveries of HPCL by providing discounts amounting to Rs 14.7 bn during 1QFY11 (Rs 1.7 bn in 1QFY10) on crude oil / LPG / kerosene purchased from them.

  • Other income decreased by 18% YoY during 1QFY11 which contributed to the bottomline decline.

What to expect?
At the current price of Rs 431, the stock trades at a multiple of 8 times our estimated FY13 earnings. We continue to advise caution on the stock as interest costs and regulatory concerns will continue to impact the short-term business performance of the company, while poor return on incremental capital expenditure will impact the long-term performance of the company.

Although the government has taken steps towards the deregulation of petrol prices, given their ‘aam aadmi’ mandate and the political opposition to such a move, it seems unlikely that a genuine structural change will actually be sustained. Moreover, the government’s resolve for market determined prices will be severely tested once crude oil prices begin their upward move from current levels.

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