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HPCL: Some respite from under-recoveries - Views on News from Equitymaster

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HPCL: Some respite from under-recoveries
Jul 31, 2009

Performance summary
  • Topline decreases by 30% YoY in 1QFY10 due to lower realisations.
  • EBITDA margins improve from -1.2% in 1QFY09 to 5.4% during the quarter. This was due to lower under-recoveries on petroleum products.
  • Other income increase by 20% YoY during 1QFY10 due to foreign exchange fluctuation gains.
  • Interest costs decline by 34%, aiding the profit before tax.
  • Bottomline also turns positive on the back of the reversal in operating margins, lower interest cost and higher other income.


Standalone financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 347,493 244,362 -29.7%
Expenditure 351,603 231,100 -34.3%
Operating profit (EBDITA) (4,110) 13,262  
EBDITA margin (%) -1.2% 5.4%  
Other income 1,679 2,018 20.2%
Interest 4,064 2,702 -33.5%
Depreciation 2,367 2,629 11.1%
Profit before tax (8,861) 9,948  
Tax 20 3,457  
Profit after tax/(loss) (8,881) 6,491  
Net profit margin (%) -2.6% 2.7%  
No. of shares (m)   339  
Diluted earnings per share (Rs)*   62.2  
Price to earnings ratio (x)*   5.8  
*On trailing twelve months earnings      
*On trailing 12 months earnings

What has driven performance in 1QFY10?
  • HPCL’s average gross refining margin during 1QFY10 was US$ 5.71 per barrel as compared to US$ 16.49 per barrel during1QFY09.The price of both crude oil and product prices declined during the period on a YoY basis, but the overall impact was lower refining margins compared to the same period last year. It may be noted that refining margins are on an upswing on a QoQ basis.

  • HPCL received subsidies on domestic LPG and Kerosene to the tune of Rs 1.4 bn during the period, as compared to Rs 1.4 bn during 1QFY09.

  • Upstream oil companies, i.e., ONGC and GAIL compensated for the under-recoveries of HPCL by providing discounts amounting to Rs 1.7 bn (Rs 23.6 bn in 1QFY09) on crude oil / LPG / kerosene purchased from them.

  • EBITDA margins tuned positive mainly on account of the decline in raw material costs (to 88% of sales) during 1QFY10 as compared to 96% in 1QFY09, due the steep decline in crude prices on a YoY basis. Staff costs increased from 1.1% in 1QFY09 to 2.5% in 1QFY10 due to provision of revision in salary for non-management staff amounting to Rs 1.9 bn, net of ad-hoc relief already paid.

  • Other Income for 1QFY10 increased by 20% YoY during 1QFY10 due to foreign exchange fluctuation gains.

What to expect?
At the current price of Rs 359, the stock trades at a multiple of 5.8 times its trailing 12 months standalone earnings. We continue to advise caution on the stock as interest costs and regulatory concerns will continue to impact the short-term performance of the company, while poor return on incremental capital expenditure will impact the long-term performance of the company. Moreover, given their ‘aam aadmi’ mandate, the government seems unlikely to bite the bullet when it comes to genuine deregulation of fuel prices.

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Nov 14, 2018 03:35 PM

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