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HPCL: Under recoveries widen net losses by 63% - Views on News from Equitymaster
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HPCL: Under recoveries widen net losses by 63%
Aug 17, 2011

HPCL has announced the first quarter results for financial year 2011-2012 (1QFY12).The company has reported a 40% year on year (YoY) growth in sales while net losses widened by 63% YoY. Here is our analysis of the results.

Performance summary
  • Topline increased by 40% YoY during the quarter.
  • The throughput came at 3.97 MMT during the quarter, up 21% from 3.29 MMT in the corresponding quarter last year.
  • he market sales (including exports) at 7.27 MMT were up 8% YoY.
  • Operating losses surged by 67% YoY during the quarter. The operating loss margin came at 6.3% for the quarter versus 5.2% in the corresponding quarter last year.
  • The net losses increased by 63% YoY during the quarter with net loss margins rising to 7.5% from 6.4% in the corresponding quarter last year.

Standalone financial snapshot
(Rs m) 1QFY 11 1QFY 12 Change
Net sales 293,015 409,169 39.6%
Expenditure 308,354 434,854 41.0%
Operating profit (EBDITA) -15,339 -25,684 NM
EBDITA margin (%) -5.2% -6.3%  
Other income 1,653 1,397 -15.5%
Interest 1,968 2,641 34.2%
Depreciation 3,174 3,886 22.4%
Pre exceptional Profit before tax -18,829 -30,815 NM
Pre exceptional Profit before tax margin (%) -6.4% -7.5%  
Exceptional items 14 -12.1 NM
Profit before tax excl. exceptional items -18,843 -30,803 NM
Tax 0 0 NM
Profit after tax/(loss) -18,843 -30,803 NM
Net profit margin (%) -6.4% -7.5%  
No. of shares (m)   339  
Diluted earnings per share (Rs)*   37.4  
P/E ratio(x)*   379.0  
*On the basis of trailing 12 months earnings

What has driven performance in 1QFY12?
  • The net sales of the company registered a 39.6% YoY increase on back of 8% YoY growth in volumes. The growth in the topline was also supported by Government subsidy worth Rs 32.7 bn versus nil compensation in the corresponding quarter of the previous year.

  • The operating losses widened to Rs 25.6 bn, up 67% YoY while loss margins deteriorated to 6.3% from 5.2% in the corresponding quarter last year. This was mainly due to high cost of raw materials. The raw material costs increased by 42% YoY, to 102.2% of sales from 100.8% of sales in the corresponding quarter of the previous year. The average gross refining margins (GRMs) during the quarter deteriorated to US$ 1.09 versus US$ 3.72 in the corresponding quarter last year. The company also received an upstream subsidy of Rs 31.7 bn versus Rs 14.7 bn last year.

  • The net losses for the quarter rose to Rs 30.8 bn from Rs 18.8 bn in the corresponding quarter last year (up 63% YoY). This was mainly on account of higher under recoveries, lack of enough compensation and deterioration of GRMs. The net under recoveries (post upstream and government compensation) amounted to Rs 30.6 bn for the quarter. The depreciation and finance charges were up 22% YoY and 34% YoY respectively. However, both items declined marginally in terms of percentage of sales. The net loss margins for the quarter deteriorated further to 7.5% from 6.4% in the corresponding quarter last year.

    Cost break-up
    (Rs m) 1QFY 11 1QFY 12 Change
    Raw materials 295,367 418,207 41.6%
    % sales 100.8% 102.2%  
    Staff cost 3,662 5,395 47.3%
    % sales 1.2% 1.3%  
    Other expenditure 9,325 11,251 20.7%
    % sales 3.2% 2.7%  
    Total cost 308,354 434,854 41.0%
    % sales 105.2% 106.3%  

What we expect?
HPCL's performance during the quarter was weak on account of dismal GRMs and unmet under recoveries. The oil refining and marketing companies are operating in a very uncertain environment as they continue to sell below the cost of the fuel and compensation from government and upstream companies is on an adhoc basis and less than the requirement.

Going forward, we expect crude prices to soften on account of slowdown in the global growth which will be a positive for all oil refining companies as it will control the magnitude of under recoveries.

At a current price of Rs 379, the stock is trading 37.4 times its trailing 12 months earnings. We are in the process of incorporating the interim results in our financial and valuation estimates and will update our subscribers soon.

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