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HPCL: Bottomline in the red - Views on News from Equitymaster

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HPCL: Bottomline in the red

Aug 14, 2013

Hindustan Petroleum Corporation Ltd (HPCL) has announced the results for the first quarter ending June 2014. For the quarter, the company has reported 16.3% year on year (YoY) growth in sales and losses at the bottomline level. Here is our analysis of the results.

Performance summary
  • For the quarter, sales were up 16.3% YoY
  • HPCL booked operating losses of RS 6.9 bn for the quarter (as compared to losses of Rs 86 bn in 1QFY13). The operating loss margins for the quarter stood at 1.3% as compared to loss margins of 19.4% in 1QFY13.
  • HPCL booked net losses worth around Rs 15 bn during the quarter, as compared to losses worth around Rs 93 bn in 1QFY13). The net loss margins for the quarter stood at 2.8%, as compared to net loss margins of 20.8% in 1QFY13.
  • The crude thruput for the quarter stood at 3.44 million tonnes/MT versus 4.32 MT in 4QFY13 and 3.58 MT in 1QFY13.
  • The market sales for the quarter stood at 7.91 MT as compared to 7.75 MT in the preceding quarter and 7.66 MT in 1QFY13.
  • The average gross refining margins (GRMs) for the quarter stood at US$ 2.58 per barrel as compared to US$ 2.05 per barrel in 1QFY13 and US$ 3.75 per barrel in 4QFY13.
  • HPCL has accounted budgetary support of Rs 18.2 bn (nil in 1QFY13) from Government of India against under recoveries on sale of sensitive petroleum products.
  • The discount from upstream companies stood at around Rs 34.9 bn for the quarter (as compared to a support of around Rs 33.6 bn in 1QFY13) on purchase of crude oil, domestic LPG and PDS kerosene.

Standalone performance summary
(Rs m) 1QFY13 1QFY14 Change
Net sales 444,976 517,639 16.3%
Expenditure 531,243 524,517 -1.3%
Operating profit (EBDITA) -86,267 -6,879 nm
EBDITA margin (%) -19.4% -1.3%  
Other income 2,126 2,042 -4.0%
Interest 3,802 4,668 22.8%
Depreciation 4,544 5,100 12.2%
Profit before tax before exceptional items -92,488 -14,605 nm
Profit before tax margin (%) -20.8% -2.8%  
Tax 0 0 nm
Profit after tax/(loss) -92,488 -14,605 nm
Net profit margin (%) -20.8% -2.8%  
No. of shares (m)   339  
Diluted earnings per share (Rs)*   257  
P/E ratio(x)**   nm  
*On trailing 12 months basis

What has driven performance in 1QFY14?
  • The sales growth in the quarter came at 16.3% YoY. This was due to higher market sales volumes and Government support to compensate for the loss on sales of sensitive petroleum products (nil in 1QFY14)

  • The operating losses for the quarter were significantly lower as compared to 1QFY13 on account of subsidy support from the Government and higher average gross refining margins. The discount from upstream companies was also higher (up 4% YoY) for the quarter.

    Cost breakup
    (Rs m) 1QFY13 1QFY14 Change
    Raw materials 493,625 494,425 0.2%
    % sales 110.9% 95.5%  
    Staff cost 9,503 4,913 -48.3%
    % sales 2.1% 0.9%  
    Other expenditure 28,115 25,180 -10.4%
    % sales 6.3% 4.9%  
    Total costs 531,243 524,517 -1.3%
    % sales 119.4% 101.3%  

  • HPCL booked losses at the bottomline level as subsidy relief was not enough to cover the losses. However, the losses were lower as compared to 1QFY13. This was mainly on account of higher GRMs and Government support. The net under recoveries for the quarter stood at Rs 5.2 bn
What to expect?
While company has got better compensation for under recoveries this year, its bottomline depends upon subsidy support. Falling rupee and ad hoc subsidy sharing mechanism is a concern for the company. At current stock price of Rs 185, the stock is trading at 4.3 times our estimated FY16 standalone earnings . We maintain a 'Hold' recommendation on the stock. Regarding target price, we shall update subscribers by the end of August 2013.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation that no single stock comprises more than 5% of your portfolio.

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