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HPCL: Challenges persist

Aug 8, 2002

As mentioned in our report for industry peers, the refining & marketing (R&M) sector continues to experience challenges in light of global excess refining capacity and theoretical dismantling of administered petroleum prices in domestic markets. Encouragingly, Hindustan Petroleum, similar to industry peers, has managed to register high single digit growth in topline.

(Rs m) 1QFY02 1QFY03 Change
Net sales 101,685 109,482 7.7%
Other Income 629 592 -5.8%
Expenditure 97,841 106,191 8.5%
Operating Profit (EBDIT) 3,843 3,291 -14.4%
Operating Profit Margin (%) 3.8% 3.0%  
Interest 758 648 -14.6%
Depreciation 1,194 1,371 14.9%
Profit before Tax 2,521 1,864 -26.0%
Tax 901 698 -22.5%
Profit after Tax/(Loss) 1,620 1,166 -28.0%
Net profit margin (%) 1.6% 1.1%  
No. of Shares 338.8 338.8  
Diluted Earnings per share* 19.1 13.8  
P/E Ratio   20.5  

In FY02, domestic refining sector exhibited negative growth in turnover due to sharp global and domestic economic downturn leading in poor realisations and slow down in volumes. The industry has reversed the trend in 1QFY03. After four consecutive quarters of lower turnover, HPCL has reported a growth in sales. As per reports, while industry throughput has increased, volume sales have not grown at an equal pace. We reckon, this is likely to have led to higher industry inventory. Domestic petroleum consumption is likely to have grown by 1% YoY in quarter ended June '02. Encouragingly, the decline in diesel consumption has been arrested. The fall is likely to have been broken by improved growth in the auto sector, especially commercial vehicles.

Industry volumes have been impacted by reduced sales of naphtha and kerosene, which could be witnessing substitution from natural gas and liquefied petroleum gas (LPG) respectively. With flat industry growth, we reckon, R&M companies have preferred to only market petroleum products. Growth in sales for HPCL is likely to have materialised from increase in products purchased for re-sale, which is higher by 7% YoY.

Operating profits have been hit largely by an 80 basis points slide in operating margins. Industry gross refining margins (GRMs) are likely to have been lower in 1QFY03. Reliance Petroleum (RPL) has also reported lower margins. International crude oil prices (Brent blend) were down 8.1% YoY at $ 25.1/ barrel over the concerned period. We reckon, YoY, blended international final product prices were lower over the same period, which could have dented GRMs. Despite changes in crude prices, global refining margins have remained squeezed over the past two years, which seems to indicate excess capacity in the industry. In the event of lower international petroleum prices, marketing margins could have increased YoY. Heating up of international crude and petroleum markets in 2002 is likely to have affected marketing margins compared to start of the calendar year.

HPCL has reported lower interest expense over the past five consecutive quarters. It is likely that the amount of funds in the oil pool has been declining over this period. Similar to BPCL, an ad-hoc sum has been received by the company amounting to Rs 1.6 bn towards LPG and kerosene subsidy. This could have eased pressure on working capital requirements. The decline in operating profits and other income has adversely impacted pre-tax profits.

At Rs 282, the scrip is trading on a multiple of 20.5x 1QFY03 annualised earnings. Compared to industry peers, the company has underperformed at the bottomline and results have come in below market expectations. Consequently, the scrip experienced selling in the previous week. In 2QFY02, the global economy was on a downturn with sliding petroleum prices. Therefore, YoY, realisations could improve in the current quarter leading to better GRMs. Valuations remain firm due to disinvestments.

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