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HPCL: Sneezes on pricing freeze

Oct 29, 2004

Introduction to results
The country’s second largest refining and marketing company, HPCL has announced its 2QFY05 results. While the topline has shown a decent rise of 16% YoY, the bottomline has dipped by nearly 34% during the quarter. The operating margins have fallen by 190 basis points.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 116,839 135,227 15.7% 240,252 271,827 13.1%
Expenditure 109,314 129,098 18.1% 229,459 260,515 13.5%
Operating profit (EBDITA) 7,525 6,129 -18.6% 10,793 11,312 4.8%
EBDITA margin (%) 6.4% 4.5%   4.5% 4.2%  
Other income 1,018 700 -31.2% 1,753 1,115 -36.4%
Interest 127 214 69.0% 228 331 45.2%
Depreciation 1,496 1,515 1.3% 2,943 3,096 5.2%
Profit before tax 6,921 5,100 -26.3% 9,375 9,000 -4.0%
Tax 2,483 2,157 -13.1% 3,363 3,584 6.6%
Profit after tax/(loss) 4,438 2,943 -33.7% 6,012 5,416 -9.9%
Net profit margin (%) 3.8% 2.2%   2.5% 2.0%  
No. of shares (m) 338.9 338.9   338.9 338.9  
Diluted earnings per share (Rs)* 52.4 34.7   35.5 32.0  
Price to earnings ratio (x)   8.9     9.6  
(* annualised)            

What is the company’s business?
HPCL is the country’s second largest oil refining and marketing company with 13 MMTPA (million tonnes per annum) of combined refining capacity and over 5,600 retail outlets spread across the length and breadth of the country. Going forward, the company is expanding the refining capacity by over 3 MMTPA and this shall result in further reduction of its dependence on external refineries for product purchases.

Sales: The topline growth of 16% during the quarter is largely due to higher volume sales during the quarter. To put things in perspective, diesel and petrol sales witnessed positive demand growth during the last quarter as compared to negative growth in the corresponding period last fiscal. Although the government allowed price hikes on two occasions, the pricing autonomy was revoked within the first month of the decision. All this resulted in losses in per litre sales for the company along with an increase in subsidies being granted on LPG and kerosene.

(%) of sales 2QFY04 2QFY05 1HFY04 1HFY05
Purchase of products for resale 58.2% 57.7% 58.7% 58.7%
Consumption of Raw materials 30.9% 32.6% 32.1% 31.8%
Staff cost 1.2% 1.2% 1.2% 1.2%
Other expenditure 3.3% 4.0% 3.5% 4.2%

Operating margins: Operating margins dipped by 190 basis points during the quarter on the back of the freeze on product pricing for most part of the last quarter. At the same time, international product prices witnessed major jump, resulting in high prices at the refinery gate. High refining margins have helped the company save the blushes with the Mumbai refinery registering GRMs of US$ 4.9 per barrel (US$ 3.6 per barrel), while the refinery in Visakh witnessed refining margins of US$ 6.7 per barrel (US$ 3.2 per barrel). But for the discounts of Rs 5.6 bn on account of ONGC and GAIL’s share towards LPG and kerosene subsidies, HPCL results could have reflected an even more dismal picture.

Net profit: Lower realizations in the face of rising costs and a dip of over 31% in other income resulted in the bottomline declining by nearly 34% during the quarter. A rise of 69% in interest obligations further dented the profitability of the company.

(Rs m) 3QFY04 4QFY04 1QFY05 2QFY05
Sales 142,595 144,831 135,851 135,227
Op. profit 13,346 8,651 5,183 6,129
Net profit 7,757 5,270 2,473 2,943

Over the last four quarters: HPCL has witnessed a consistent decline in topline since 4QFY04. This is due to the continuing freeze on product pricing over the last few months, while the operating profits have improved during 2QFY05 as a result of reduction in customs and excise duties.

What to expect?
At Rs 308, the stock is currently trading at a price to earnings multiple of 8.9x 2QFY05 annualized earnings. Going forward, the company is increasing its refining capacity and is also planning to geographically expand with a planned entry into Sri Lankan markets for retail fuels. Higher refining capacity could mean higher margins for the company as product prices are linked to import parity prices. However, government policies are likely to play an important role in the company’s fortunes going forward.

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