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HPCL : GRMs disappoint during the quarter - Views on News from Equitymaster

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HPCL : GRMs disappoint during the quarter

Aug 21, 2014

Hindustan Petroleum Corporation Ltd (HPCL) has announced the results for the quarter ended June 2014. The company has reported 14.4% year on year (YoY) growth in sales and net profit at Rs 460 m for the quarter. Here is our analysis of the results.

Performance summary
  • For the quarter, sales were up 14.4% YoY.
  • The company reported operating profit of Rs 5.9 bn for the quarter, with margins at 1.0% versus loss margins at 1.5% in 1QFY14.
  • The net profits for the quarter stood at Rs 460 m, with net profit margin at 0.1%, as compared to loss margin of 2.8% in 1QFY14.
  • The average gross refining margins (GRMs) for the year stood at US$ 2.04 per barrel, down from US$ 2.58 per barrel in 1QFY14.
  • For 1QFY15, the company incurred under recovery loss of Rs 66.2 bn. It received budgetary support of Rs 25.2 bn, up 38.1% YoY. The compensation from upstream segment for fuel under recoveries stood at Rs 36.1 bn, up 3.5% YoY. The net under recoveries stood at around Rs 4.5 bn for the quarter.
  • The crude throughput for the quarter stood at 3.28 million tonnes (MT), versus 3.44 MT in 1QFY14 and 4.34 MT in the preceding quarter. The decline in the crude throughput was mainly on account of maintenance shutdowns at its two refineries
  • The market sales (including exports) for the quarter came in at 8.34 MT, versus 7.91 MT in 1QFY14 and 8.04 MT in the preceding quarter.

(Rs m) 1QFY14 1QFY15 Change
Operating revenues 517,639 592,158 14.4%
Expenditure 525,164 586,259 11.6%
Operating profit (EBDITA) -7,525 5,898 nm
EBDITA margin (%) -1.5% 1.0%  
Other income 2,042 1,979 -3.1%
Interest 4,021 1,295 -67.8%
Depreciation 5,100 5,897 15.6%
Profit before tax before exceptional items -14,605 685 nm
Profit before tax margin (%) -2.8% 0.1%  
Tax 0 225 nm
Profit after tax/(loss) -14,605 460 nm
Net profit margin (%) -2.8% 0.1%  
No. of shares (m)   339  
Diluted earnings per share (Rs)*   95.7  
P/E ratio(x)*   4.7  
*On a trailing 12 months basis

What has driven performance in 1QFY15?
  • The revenues during the year were up by 14.0% YoY mainly due to higher petroleum product sales.

  • The company reported operating margin of 1.0% for the quarter, as compared to losses in 1QFY14. The gross refining margins for the quarter declined to US$ 2.04 per barrel, down from US$ 2.58 per barrel in 1QFY14.

  • HPCL reported net profit margins of 0.1% for the quarter. The gross under recoveries for HPCL stood at Rs 66.2 bn, of which the company had to bear net under recoveries worth Rs 4.9 bn. The rest was compensated by upstream companies and the Government. The bottomline was boosted by around 67.8% decline in the interest costs.

    Cost breakup
    (Rs m) 1QFY14 1QFY15 Change
    Raw materials 494,425 564,654 14.2%
    % sales 95.5% 95.4%  
    Staff cost 4,913 6,644 35.3%
    % sales 0.9% 1.1%  
    Other expenditure 25,826 14,997 -41.9%
    % sales 5.0% 2.5%  
    Total costs 525,164 586,295 11.6%
    % sales 101.5% 99.0%  
What to expect?

The phased hike in diesel prices has been positive for state run oil marketing companies as it leads to lower interest costs and efficient working capital management. Going forward, the under recoveries are likely to come further down. However, an increase in crude prices or rupee depreciation can offset the benefits. Also, the company is planning to expand capacity. Already its return ratios remain low and debt levels are higher than our comfort level.

The stock price of HPCL has seen a run up recently (87% up in the year till date) and stock is currently trading at a trailing twelve months price to earnings multiple of around 4.7 times.

We recommend investors not to buy the stock at current prices.

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