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HPCL: APM effect is fading

Jul 31, 2003

Hindustan Petroleum Corporation (HPCL) announced its first quarter FY04 results yesterday. The company reported a 12% rise in its topline while the bottomline was up by about 35%. Let's take a detailed look at the results.

(Rs m) 1QFY03 1QFY04 Change
Net sales 109,482 122,619 12.0%
Other Income 592 489 -17.5%
Expenditure 106,191 119,104 12.2%
Operating Profit (EBDIT) 3,291 3,514 6.8%
Operating Profit Margin (%) 3.0% 2.9%  
Interest 648 101 -84.3%
Depreciation 1,371 1,448 5.6%
Profit before Tax 1,864 2,454 31.6%
Tax 698 880 26.1%
Profit after Tax/(Loss) 1,166 1,573 34.9%
Net profit margin (%) 1.1% 1.3%  
No. of Shares 338.8 338.8  
Diluted Earnings per share* 13.8 18.6  
P/E Ratio   17.8  

The 12% rise in topline seems to be on account of higher sales of petrol, diesel and LPG during the quarter. Also, higher realisations on a YoY basis seem to have led to higher growth in topline. Demand of petrol, LPG and diesel is expected to increase in future and this will lead to higher volume growth for players like HPCL going forward. However, we expect that the realisations will be lower during the remaining period of FY04 and this will curb the effect of increased volumes. It should be noted that the prices of petrol and diesel were reduced during June quarter thrice and this will result in lower realisations going forward.

Expenses increased at the same pace as topline during the June quarter. Crude prices were at higher levels as compared 1QFY03 and this resulted in increased expenses. This apart increase in expenses on the stocks front also led to increased expenses. As a result of this, the operating margins remained at the same levels. Gross refining margins at Mumbai refinery were at higher levels while Visakh Refinery witnessed a decline.

HPCL reduced its interest outgo significantly by about 84% during the quarter and this added significantly to the bottomline growth of the company. In addition to this, increased sales further helped the company to improve its bottomline, which increased by about 35% during the June quarter 2003.

At Rs 333, the stock is trading at a P/E multiple of 8.8x its FY04E earnings. The company is unlikely to pose results in line with FY03 results (an effect of APM dismantling). In FY03, the company posted about 95% growth in bottomline as a result of higher realization on account of increased product prices. Moreover, the prices have declined thrice during the last quarter and with crude expected to stabilize at the current levels, prices may not see any further revision. Hence, the company is unlikely to realize the same level of profit growth in FY04. However, better monsoons, increased industrial activity and expected 12% growth in volumes in auto sector are a long term positive for the company. This apart the stabilization in crude oil prices will also benefit the company going forward.

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