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HPCL: Is it all about divestment? - Views on News from Equitymaster
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  • Sep 25, 2003

    HPCL: Is it all about divestment?

    HPCL had run up on the bourses on the hopes of divestment of government’s stake to some strategic partner. However the recent stay imposed by the Supreme Court has stalled the divestment process. This has impaired investor sentiments towards the stock as was reflected by the steep fall in the stock price recently. However should the sentiments towards the stock be solely governed by divestment? What are the prospects of the company in future? We try to take a look at the same.

    HPCL is the second largest oil refining and marketing company in India. It has a capacity of about 13 m tonnes located at Mumbai (5.5 MTPA) and Visakh (7.5 MTPA). It also has a large network of 4,863 petrol pumps, 1,644 kerosene dealers, and has a customer base of about 18 m for its LPG business, thus making HPCL a major player with a pan India presence. Historically it has been observed that the company has performed in line with GDP growth and is expected to reflect similar performance in the long term also. Thus it is expected that with better economic prospects of the country, HPCL would also continue to exhibit improvement in its performance. In FY03, rising volumes and higher product prices aided the company in reporting a strong topline as well as bottomline performance. This apart the company was successful in sourcing crude oil at a lower cost and this also aided improvement in its refinery margins. It sources about 70% of its crude oil requirement internationally.

    As far as the company’s future plans are concerned, it has a capex plan of about Rs 80 bn up to FY07. Out of this, about 33% would be used to upgrade its refineries to meet Euro norms and this would also help in increasing the refinery capacity from the existing 13 MTPA to about 16.3 MTPA by FY06. In the scenario of rising competition in retail segment, the company has planned an investment of about Rs 11 bn (14%) up to FY07 for the same. It should be noted that BPCL was the first to start initiatives on the marketing front. However HPCL has also realised the importance of marketing and has plans to increase its business in retail front by following an aggressive brand building exercise. It should be noted that the retail segment leads to higher margins and any increase in business mix towards this segment would result in overall margins improvement.

    Also the company is planning to bid for oil and gas exploration blocks in the NELP-IV round in consortium with major explorers. It has embarked a plan of about Rs 5 bn on this front. However any major success in this front might raise the capex requirements for this initiative to about Rs 15 bn. While the capex plans of the company seem large, strong internal cash flows are likely to ensure that the pressure on the balance sheet may be minimal. Apart from this the thrust on LPG and lubricant businesses, which commands higher margins is also likely to increase contribution from these segments. It has about 25% share in case of lubricants business and has a large customer base of about 18 m in case of LPG. The company seems to be focusing on higher margin businesses and this would help it to improve its margins in future.

    At Rs 359, the stock is trading at a P/E multiple of about 10.5x its FY04E earnings. Though short-term concerns are there on account of sluggish volume growth, it is expected that from a long term perspective the company would move more or less in line with the GDP growth. Thus improving prospects on the economic front is a long term positive for the company. Also increasing mix on the retail segment would also lead to an improvement on the margin front.



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