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HPCL: Higher GRMs boost profit
Sep 8, 2015

Hindustan Petroleum Corporation Ltd (HPCL) has announced results for the quarter ended June 2015. The company has reported sales decline of 12.6% YoY for the quarter while net profits grew by 3349% YoY. Here is our analysis of the results.

Performance summary
  • Topline declines by 12.6% YoY.
  • The market sales (including exports) for the quarter stood at 3.75 MMT, up 2.9% YoY.
  • The operating profit for the quarter grew by 467% YoY, with operating profit margin at 5.8%, versus 0.9% in 1QFY15.
  • The net profit for the quarter grew by 3349% YoY with net profit margin at 3.1%, versus 0.1% in 1QFY15.
  • The crude throughput for the quarter stood at 3.75 million tonnes (MT), up 14.3% YoY.
  • For 1QFY16, the average GRMs stood at US$ 8.56 per barrel, versus US$ 2.04 per barrel in 1QFY15.
  • During the quarter, the subsidy from the Government on sale of PDS Kerosene and domestic LPG amounted to nil versus subsidy of Rs 1.8 bn in 1QFY15.
  • For the quarter, the company's has accounted for Rs 4.5bn (versus Rs 25.2 bn in 1QFY15) compensation from the Government of India.
  • The discount from upstream segment stood at around Rs 2.2 bn, versus a discount of Rs 36.1 bn in 1QFY15.
  • The company did not bear any net under recovery during the quarter (versus net under recovery loss of Rs 4.5 bn in 1QFY15).

Financial summary
(Rs m) 1QFY15 1QFY16 Change
Net Sales 591,734 517,204 -12.6%
Other operating income 641 829 29.3%
Total Operating revenues 592,375 518,033 -12.5%
Expenditure 586,476 487,402 -16.9%
Operating profit (EBDITA) 5,258 29,802 466.8%
EBDITA margin (%) 0.9% 5.8%  
Other income 1,979 2,309 16.7%
Interest 1,295 1,227 -5.2%
Depreciation 5,897 7,508 27.3%
Profit before tax before exceptional items 685 24,204 3432.4%
Profit before tax margin (%) 0.1% 4.7%  
Tax 225 8,324 3602.8%
Effective tax rate (%) 32.8% 34.4%  
Profit after tax/(loss) 460 15,880 3349.3%
Net profit margin (%) 0.1% 3.1%  
No. of shares (m)   339  
Diluted earnings per share (Rs)*   126.3  
P/E ratio(x)*   6.0  
(*On a trailing 12-month basis)

What has driven performance during 1QFY16?
  • Lower realizations led to a decline in the topline by 12.6% YoY.

  • Inventory gains and higher GRMs led to a better performance for the quarter. The operating margins as such expanded to 5.8% from 0.9% in 1QFY15.

  • The company did not incur any under recovery loss for the quarter (versus a loss of around Rs 4.5 bn in the corresponding quarter last year). A strong performance at the operating level, along with an increase in other income led to an increase in the net profit on a year on year basis. However, the gain was offset to some extent due to higher depreciation expense.

    Cost breakup
    (Rs m) 1QFY15 1QFY16 Change
    Raw materials 564,618 450,347 -20.2%
    % sales 95.4% 87.1%  
    Staff cost 6,644 6,340 -4.6%
    % sales 1.1% 1.2%  
    Other expenditure 15,214 30,715 101.9%
    % sales 2.6% 5.9%  
    Total costs 586,476 487,402 -16.9%
    % sales 99.1% 94.2%  
What to expect?
The numbers for the quarter are not comparable on account of timing mismatch as far as subsidy payments are concerned and inventory impact. Given the fuel reforms, the state owned oil marketing companies are operating in better environment. However, a lot of these positives are already captured in the valuations. Further, the OMCs benefitted in the quarter ended June 2015 because of inventory gains and high GRMs that may not be sustainable.

At current price of Rs 765, the stock is trading at around 6 times price to earnings (on a trailing 12 months basis) and around 1.9 times price to book value. We are in the process of updating financial projections for the company and will update subscribers about the revised target price soon. Until then, we suggest investors to avoid buying the stock of HPCL.

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