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HPCL: Sell more, lose more! - Views on News from Equitymaster

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HPCL: Sell more, lose more!
Jul 27, 2006

Performance summary:
Refining and marketing major, HPCL has announced results for 1QFY07. While the topline has grown by 37% YoY, operating profits and bottomline have borne the brunt of subsidy burden, due to increased crude and product prices. As such, both operating as well as net profits moved deeper into the red.

Financial snapshot…
(Rs m) 1QFY06 1QFY07 Change
Net sales 150,761 206,741 37.1%
Expenditure 154,695 211,907 37.0%
Operating profit(EBDITA) (3,934) (5,166) N.A
EBDITA margins(%) -2.6% -2.5%  
Other income 682 1,021 49.7%
Interest expenses 142 596 321.1%
Depreciation 1,663 1,701 2.3%
Profit before tax (5,056) (6,442) N.A
Tax (23) 366 N.A
Profit after Tax (5,079) (6,077) 19.6%
Net profit margin(%) -3.4% -2.9%  
No.of shares(m) 338.9 338.9  
Diluted earnings per share (15.0) (17.9)  
Price to earning ratio.(x)*   24.5  
*Based on twelve months trailing

What is the company's business?
HPCL is the country’s third largest integrated oil marketing company with over 7,500 retail outlets, spread across the length and breadth of the country. The company has just over 20% market share in the diesel business and a 25% market share in retail petrol sales. Also, HPCL has a strong presence in the LPG business accounting for a quarter of the industry volumes and catering to over 19 m customers. The company operates two refineries, one at Vishakhapatnam, with a rated capacity of 7.5 million metric tonnes (MMT) and the other at Mumbai, having capacity of 5.5 MMT.

What has driven performance in FY06?
Topline growth robust: HPCL registered a 37% YoY growth in its topline. Growth in the topline was due to increased realisations on non-subsidized products along with price increases in subsidized products during July and September last year. And the recent hike in price of petrol (8%) and diesel (6%) in June 2006 has helped matters. Thus, realisation grew at a much faster pace than the volumes growth. As per petroleum planning and analysis Cell (PPAC), consumption of petroleum products grew by 7.4% during April and May 2006. Thus, the consumption growth would have been in the range of 7% to 8% for the quarter ended June 2006. The consumption of high-speed diesel (HSD), which accounts for more than a third of the total consumption of the petroleum products, registered a growth of 12.7% during the quarter. MS (petrol) demand also grew at a faster pace of 11.5%, while LPG demand grew by 3.4% YoY. Thus, the growth in sales due to increase in realisation could be in the range of 25% to 30%.

Business mix saves margins: The consumption of raw material increased by 93% YoY during the quarter. However, operating margin in 1QFY07 was flat. The capacity utilisation during the quarter was robust at 130% (90% in 1QFY06). This higher output has enabled HPCL meet most of its product requirements on its own, which is reflected in purchases of products of resale declining as a percentage of sales in 1QFY07 (table below). Gross refining margins (GRM’s) for the Mumbai refinery during the quarter was US$ 8.82 per barrel against US$ 3.97 per barrel in 1QFY06. The Visakh refinery has reported GRM’s of US$ 9.59 per barrel as against US$ 4.89 in 1QFY06. During 1QFY07, raw material cost was lower to the extent of Rs 904 m and Rs 12.3 bn respectively, which was the discount received on petroleum products and crude purchased respectively. Under-recoveries stood at Rs 21 bn in 1QFY07. Even after the recent price revision, HPCL is still incurring a loss of Rs 5.6 per litre on petrol, Rs 7.9 per litre on diesel, Rs 18.8 on kerosene and Rs 133 per cylinder on LPG.

Expenditure break up…
(Rs m) 1QFY06 1QFY07 Change
Consumption of raw material 45384.1 87348.3 92.5%
as a % of sales 30.1% 42.3%  
Staff Cost 1590.3 1656.7 4.2%
as a % of sales 1.1% 0.8%  
Purchase of product of resale 100140.7 114243.2  
as a % of sales 66.4% 55.3%  
Other expenditure 7580.1 8658.9 14.2%
as a % of sales 5.0% 4.2%  

Usual but a costly affair: Weak operating performance had an impact on the cash flows of the firm. Thus, borrowings have risen to meet the working capital requirements, which can be gauged from fact that interest expenditure has almost tripled during 1QFY07.

Performance over the recent past…
(Rs m) 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07
Sales growth(YoY) 10.4% 24.7% 12.5% 27.2% 37.1%
Operating profit margins -2.6% 0.4% -4.8% 9.4% -2.5%
Net profit margins -3.4% -0.1% -5.9% 9.7% -2.9%
Net profit growth(YoY) N.A N.A N.A 302.8% N.A.
*N.A= Not applicable due to negative growth

What to expect?
At the current price of Rs 221, the stock is trading at a price to earnings multiple of 24.5 times its trailing twelve months earnings. The absence of market dynamics in the pricing of the petroleum product continues to hurt the company’s profitability. After the recent hike in prices of petrol and diesel, the government has denied any further prices rise in the near term despite rising crude prices. Thus, the fortunes of the company do not seem like turning around any time in the near future. The only solace could come from oil bonds over the course of the fiscal year. We suggest investors to stay away from the stock, as the risk-return trade-off is highly tilted towards risks.

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Sep 21, 2018 09:23 AM

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