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HPCL v/s BPCL: Who’s the better player? - Views on News from Equitymaster
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  • Sep 20, 2004

    HPCL v/s BPCL: Who’s the better player?

    Post disinvestment blues, the government is now eyeing a ‘merger of sorts’ between oil companies with BPCL being merged with ONGC while HPCL falling into IOC’s kitty. The aim is to create substantial entry blocks for new private and international players. With over 22,000 retail outlets by the turn of this fiscal and only a 3% to 4% growth across the energy sector, this move seems to be a positive for the downstream oil marketing companies so as to sustain profitability and growth.

    In this backdrop, let us take a look at the business profiles of the two marketing majors – HPCL and BPCL, based on certain key factors.

    • Refineries: BPCL, with a refining capacity of 8.7 MTPA (million tonnes per annum) on its books is way behind HPCL’s refining capacity of nearly 13 MTPA. As a result, the former is more dependent on external sources for products as compared to the latter. With firm international product prices backed by strong demand, refining margins in FY04 have been robust as a result of import parity pricing enjoyed by the refineries. Both the oil majors are increasing capacity of their refineries going forward, with BPCL increasing Mumbai refinery’s capacity by nearly 3.5 MTPA while HPCL increasing the combined capacity by 3 MTPA.

      FY04 BPCL HPCL
      Refining Cap (MMTPA) 8.7 13.0
      Crude throughput (MMTPA) 8.8 13.7
      Gross refining margins 4.6 4.4*

      * Combined refining margins of two refineries at Mumbai and Visakh

    • Retail marketing: On this front, BPCL has proved to be more aggressive as compared to HPCL. As mentioned above, although BPCL’s external dependence for products is higher as compared to HPCL, the company was able to increase its market share in FY04 in some of the major products (like diesel, LPG and naphtha).

      FY04 BPCL HPCL
      Retail outlets 5,527 5,502
      Market sales (MMTPA) 20.4 19.5
      LPG distributors 1,922 1,993
      LPG customers (m) 19.4 19.9
      LPG sales (MMTPA) 2.3 2.3
      Market share - LPG (%) 25.6 25.1
      Market share - diesel (%) 24.3 20.1
      External dependence (%) 59.0% 29.9%

    • Operational performance: During FY04, although BPCL witnessed higher sales growth as compared to HPCL, the operating profit margins were lower than the latter. This was largely due to the fact that BPCL had to shell out a large portion of its operating expenditure towards other refineries for products traded (purchase for resale) given the fact that BPCL sources nearly 59% of its product portfolio from external sources such as its subsidiary Kochi Refineries and Numaligarh refineries (not on BPCL’s books). On the contrary, HPCL’s external dependence is only to the tune of 30%, enabling the company to enjoy higher product margins. At the same time, better capacity utilization and high growth investments enabled BPCL to achieve higher returns on assets and networth respectively.

      A peek at the performance (%) BPCL HPCL
      Sales growth 10.8 5.7
      OPM 5.9 6.4
      NPM 3.5 3.7
      RONW 29.0 24.6
      ROA 20.3 20.2

    Through this performance analysis, it seems that the two majors are on the same growth trajectory. However, with a slight diversification in its product portfolio (LNG – Liquefied Natural Gas), BPCL seems to be having a slight advantage in the marketing business. Further, the company is also contemplating entry into nearly 20 cities with gas distribution. On the other hand, HPCL is yet to take a concrete step in the LNG business. Although high refining capacity insulates HPCL to some extent from the squeeze in marketing margins, the same advantage over BPCL shall be negated to some extent after FY05 when BPCL increases capacity to 12 MTPA. Further, the merger of Kochi Refineries shall bring in more operational efficiencies to BPCL and also bring in the refining margins on to the company’s books.

    Valuations BPCL HPCL
    Current market price (Rs) 365.0 326.0
    EPS (Rs) * 19.6 29.2
    P/E (x) 18.6 11.2

    * 1QFY05 annualized



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