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HPCL v/s BPCL: Relative standing (Part II) - Views on News from Equitymaster
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HPCL v/s BPCL: Relative standing (Part II)
Aug 7, 2006

In the previous article, we provided the comparative overview of the business profile of HPCL and BPCL. In the Part-II, we analyse the comparative financial performance of these companies over the last four years. Here are the key takeaways.

Financial overview:

Common size Profit and loss statement (Consolidated)
Particulars FY02 FY03 FY04 FY05
(Rs m) HPCL BPCL HPCL BPCL HPCL BPCL HPCL BPCL
Gross sales 444,570 455,006 557,426 569,253 596,871 627,720 687,687 720,366
Excise % gross sales 11% N.A. 10% 12% 10% 11% 8% 11%
Net sales 396,565 458,011 499,992 503,770 534,816 555,630 629,681 644,248
% of net sales 100% 100% 100% 100% 100% 100% 100% 100%
Operating expenditure 378615 431,666 471,509 465,476 501,675 510,197 605,929 606,557
% of net sales 95.5% 94.2% 94.3% 92.4% 93.8% 91.8% 96.2% 94.1%
EBDITA 17,950 26,346 28,483 38,295 33,141 45,433 23,752 37,692
% of net sales 5% 6% 6% 8% 6.2% 8.2% 3.8% 5.9%
Other income 2495.9 2,800 3,601 3,517 4,863 4,262 3,714 3,575
% of net sales 0.6% 0.6% 0.7% 0.7% 0.9% 0.8% 0.6% 0.6%
Depreciation 5201.7 7,271 6,358 7,362 6,756 8,266 7,367 8,810
% of net sales 1.3% 1.6% 1.3% 1.5% 1.3% 1.5% 1.2% 1.4%
Interest 2947.4 6,212 2,493 4,911 1,282 2,577 1,333 2,469
% of net sales 0.7% 1.4% 0.5% 1.0% 0.2% 0.5% 0.2% 0.4%
PBT* 12,297 15,662 23,233 29,539 29,966 38,853 18,766 29,988
% of net sales 3.1% 3.4% 4.6% 5.9% 5.6% 7.0% 3.0% 4.7%
Misc. exp written off - 42 54 37 55 219 54 3
Prior period adjustments 73 (172) (152) 61.25 762 (304) 1 (231)
Adjusted PBT 12,224 15,448 23,027 29,564 30,674 38,330 18,713 29,754
% of net sales 3.1% 3.4% 4.6% 5.9% 5.7% 6.9% 3.0% 4.6%
Tax 4345 5,371 8,347 11,339 10,915 14,686 4,556 3,906
% of net sales 1.1% 1.2% 1.7% 2.3% 2.0% 2.6% 0.7% 0.6%
Profit after Tax 7,879 10,077 14,680 18,225 19,759 23,644 14,156 25,848
% of net sales 2.0% 2.2% 2.9% 3.6% 3.7% 4.3% 2.2% 4.0%
Minority Interest - 766 - 2,697 - 3,305 - 5,321
Net income 7,879 9,311 14,680 15,528 19,759 20,339 14,156 20,527
% of net sales 2.0% 2.0% 2.9% 3.1% 3.7% 3.7% 2.2% 3.2%
*Profit before mis. Exp and prior period adjustments.

Comparative financial performance of HPCL and BPCL:
Sales analysis: Consolidated sales have grown at a CAGR of 16.5% for BPCL (over FY02 to FY05) as against 15.7% in the case of HPCL. On a standalone basis, BPCL registered a realisations growth of 15% in the same period, while the same for HPCL was 11.4%. In terms of volumes sold, both the companies have registered around 3% CAGR in the last four years. However, considering the volumes spread, BPCL sold 4% more products in FY02, which increased to 5.7% in FY04. However, the volumes spread, decline to 4.7% in FY05. Thus highlighting the fact that HPCL has aggressively gained market share in retail sales. Aggressiveness of HPCL can been seen from its increased emphasis on its brand, visual identity of its outlets, and increased emphasis on advertisement.

Operating performance analysis: Operating profit margins for BPCL (for FY02 to FY05) are higher as compared to HPCL. This is due BPCLs interest in other businesses that include gas distribution along with superior margins on its refining assets as compared to HPCL. Moreover, HPCL relies relatively more on third party purchases (i.e. petroleum products purchased from other refineries for retail sales due to the lack of capacity on its own). This impacts margins because purchasing more from refineries is costly, especially during times of high refining margins like it has been the case in the last four years. Cost of crude oil for both the companies is more or less similar. This can be explained from the fact that before deregulation of the refining business, IOC (canalizing agent) handled crude oil purchases for both the companies. Post the dismantling of the APM (administered pricing mechanism), both companies have set up their own crude trading desk.

Ratio Analysis*
Particulars FY02 FY03 FY04 FY05
(Rs m) HPCL BPCL HPCL BPCL HPCL BPCL HPCL BPCL
Operating margins 4.5% 5.8% 5.7% 7.6% 6.2% 8.2% 3.8% 5.9%
Net profit margins 2.0% 2.0% 2.9% 3.1% 3.7% 3.7% 2.2% 3.2%
Current ratio 1.0 1.1 0.9 1.0 1.1 1.0 1.2 1.2
Receivable turnover ratio 50.6 33.5 54.3 34.9 46.8 37.8 51.8 44.4
Total asset turnover ratio 2.6 2.5 2.7 2.3 4.3 2.4 3.1 2.4
Fixed asset turnover ratio 5.7 4.8 6.2 4.8 6.4 4.8 7.0 5.1
Equity turnover ratio 6.7 11.1 8.5 9.8 7.1 8.5 7.5 8.4
Debt/ Equity 0.5 1.6 0.4 1.1 0.4 0.7 0.4 0.7
* Based on consolidated numbers.

The current ratio for BPCL is higher than that of HPCL, as receivables (debtors) are higher in comparison to that of HPCL. As far as the utilisation of fixed assets is concerned, HPCL scores over BPCL. Overall, HPCL utilizes its assets more efficiently than BPCL.

Conclusion:
With HPCL taking steps to increase its refining capacity, it will rely less on third party purchases, which is a positive. BPCL is also taking steps to increase its refining capacity and increased presence in marketing segment. In our view, the bigger challenge for these companies is likely to emerge on the marketing front.

With private sector players as well as ONGC expected to invest heavily on the retail front, it will result in lower thruput per outlet going forward. This, in our view, will impact marketing margins. This is perhaps the major reason why oil-marketing companies are stepping up their plans on the non-oil retail revenues that include retail outlets in petrol pumps, credit card arrangements and food services. Internationally, non-oil retail revenues contributed between 10% to 20% of revenues and a higher share of profits per outlet. HPCL and BPCL have already made significant progress on these fronts. But non-fuel retail revenues for now are insignificant.

While this is the challenge for oil marketing companies, meanwhile, the ministry has directed marketing companies to control their retail expansion plans. As we have highlighted in our previous articles, the Indian refining sector is likely to witness significant excesses in capacity over the next five years. This will result in companies relying on exports heavily to maintain capacity utilisation at a meaningful level. It is pertinent to note that export margins are lower than domestic sales. Overall, we expect operating margins of BPCL and HPCL to come under significant pressure, not only from policy matters but also from competitive factors.

So, should one invest in oil marketing companies? If yes, is BPCL better than HPCL? How to value refining companies? Find out in our concluding part of this article this week.

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