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HPCL: Awaiting genuine price deregulation - Views on News from Equitymaster

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HPCL: Awaiting genuine price deregulation
Oct 29, 2009

Performance summary
  • Topline decreases by 31% YoY in 2QFY10 due to lower realisations.
  • EBITDA margins improve from -7.2% in 2QFY09 to 0.7% during the quarter. This was due to lower under-recoveries on petroleum products.
  • Other income increases by 55% YoY during 2QFY10.
  • Interest costs decline by 53% during the quarter.
  • Bottomline remains negative despite the reversal in operating margins, lower interest cost and higher other income.
  • For 1HFY10, bottomline turns positive despite a 30% decline in the topline.


Standalone financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 355,747 246,290 -30.8% 703,323 490,651 -30.2%
Expenditure 381,185 244,571 -35.8% 732,281 475,670 -35.0%
Operating profit (EBDITA) (25,438) 1,719   (28,958) 14,981  
EBDITA margin (%) -7.2% 0.7%   -4.1% 3.1%  
Other income 978 1,512 54.6% 2,067 3,530 70.8%
Interest 5,269 2,493 -52.7% 9,333 5,195 -44.3%
Depreciation 2,420 2,833 17.1% 4,787 5,462 14.1%
Profit before tax (32,149) (2,095)   (41,011) 7,853  
Exceptional item - (2)   - (2)  
Tax 40 (727)   60 2,730  
Profit after tax/(loss) (32,189) (1,367)   (41,071) 5,124  
Net profit margin (%) -9.0% -0.6%   -5.8% 1.0%  
No. of shares (m)         339  
Diluted earnings per share (Rs)*         153  
Price to earnings ratio (x)*         2  
*On trailing 12 months earnings

What has driven performance in 1HFY10?
  • HPCL's average gross refining margin during 1HFY10 was US$ 3.79 per barrel as compared to US$ 4.75 per barrel during 1HFY09.The price of both crude oil and product prices declined during the period on a YoY basis, but the overall impact was lower refining margins compared to the same period last year.

  • The company achieved a crude throughput of 4.02 m tonnes (MMT) during 2QFY10 as opposed to 4.19 MT in 2QFY09. For 1HFY10, HPCL achieved 8.12 MT as opposed to 7.55 MT during the first half of last fiscal.

  • EBITDA margins tuned positive mainly on account of the decline in raw material costs (to 92.5% of sales) during 2QFY10 as compared to 101.6% in 2QFY09, due the steep decline in crude prices on a YoY basis.

    Cost break-up
    (Rs m) 2QFY09 2QFY10 Change
    Raw materials 361,390 227,732 -37.0%
    % sales 101.6% 92.5%  
    Staff cost 3,452 1,631 -52.7%
    % sales 1.0% 0.7%  
    Other expenditure 16,344 15,208 -7.0%
    % sales 4.6% 6.2%  
    Total cost 381,185 244,571 -35.8%
    % sales 107.2% 99.3%  

  • HPCL received subsidies on domestic LPG and Kerosene to the tune of Rs 2.9 bn during 1HFY10, as compared to Rs 2.8 bn during 1HFY09.

  • Upstream oil companies, i.e., ONGC and GAIL compensated for the under-recoveries of HPCL by providing discounts amounting to Rs 9.3 bn during 1HFY10 (Rs 53.8 bn in 1HFY09) on crude oil / LPG / kerosene purchased from them.

What to expect?
At the current price of Rs 348, the stock trades at a multiple of 7 times our estimated FY12 earnings. We continue to advise caution on the stock as interest costs and regulatory concerns will continue to impact the short-term performance of the company, while poor return on incremental capital expenditure will impact the long-term performance of the company. Moreover, given their 'aam aadmi' mandate, the government seems unlikely to bite the bullet when it comes to genuine deregulation of fuel prices.

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