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HPCL: Itís the under recoveries again - Views on News from Equitymaster
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HPCL: Itís the under recoveries again
Oct 30, 2007

Performance summary
  • Topline declines by 0.5% YoY during 2QFY08, mainly due to under recovery of product prices.

  • EBITDA margins contract to 5.4%, from 6.8% in 2QFY07 due to rise in other expenditure.

  • Other income rises by 46% YoY during the quarter.

  • Bottomline registers a decline of 30% YoY owing to erosion in operating margin and higher taxes.

  • Topline and bottomline grow 2.4% YoY and 41.6% YoY respectively in 1HFY08.

Financial snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 243,675 242,344 -0.5% 450,416 461,161 2.4%
Expenditure 227,212 229,169 0.9% 439,119 449,271 2.3%
Operating profit (EBDITA) 16,462 13,176 -20.0% 11,296 11,891 5.3%
EBDITA margin (%) 6.8% 5.4% 2.5% 2.6%
Other income 1,925 2,808 45.8% 2,946 6,159 109.0%
Interest 983 1,399 42.2% 1,579 2,732 73.0%
Depreciation 1,742 2,017 15.8% 3,443 3,815 10.8%
Profit before tax 15,663 12,568 -19.8% 9,220 11,502 24.7%
Tax 3,443 4,037 17.3% 3,809 3,841 0.8%
Profit after tax/(loss) 12,220 8,530 -30.2% 5,412 7,661 41.6%
Net profit margin (%) 5.0% 3.5% 1.2% 1.7%
No. of shares (m) 339.4
Diluted earnings per share (Rs)* 50.77
Price to earnings ratio (x)* 4.7
(* on trailing twelve months earnings)

What is the companyís business?
HPCL is the countryís third largest integrated oil marketing company with over 7,500 retail outlets, spread across the length and breadth of the country. The company has just over 20% market share in the diesel business and a 25% market share in retail petrol sales. HPCL also has a strong presence in the LPG business accounting for a quarter of the industry volumes and catering to over 19 m customers. The company operates two refineries, one at Visakhapatnam, with a rated capacity of 7.5 million metric tonnes (MMT) and the other at Mumbai, having capacity of 5.5 MMT. HPCL is progressing towards setting up of a refinery at Bhatinda, Punjab.

What has driven performance in 2QFY08?
Crude prices and under recovery: The results of the company continue to be adversely affected by high crude and product prices. With crude prices scaling all time highs of $ 90 per barrel, downstream companies face high input costs. Moreover, HPCL operates in the domestic markets and cannot pass on the costs fully to the consumers.

The pressure was eased to an extent by the discounts from upstream oil companies (ONGC and GAIL) to the tune of Rs 9 bn. However, it must be noted that the upstream companies have trouble providing discounts. In fact, the discount in the comparable period last year was higher at Rs 12 bn.

The company also received in principle approval from the Government of India for issuance of Oil Bonds amounting to Rs 24 bn for 1HFY08, which went a long way in restricting the damage to the topline.

Cost break-up
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Raw materials 215,271 214,820 -0.2% 416,862 425,616 2.1%
% sales 88.3% 88.6% 92.6% 92.3%
Staff cost 2,202 2,067 -6.1% 3,859 3,872 0.3%
% sales 0.9% 0.9% 0.9% 0.8%
Other expenditure 9,740 12,282 26.1% 18,398 19,784 7.5%
% sales 4.0% 5.1% 4.1% 4.3%
Total cost 227,212 229,169 0.9% 439,119 449,271 2.3%
% sales 93.2% 94.6% 97.5% 97.4%

Better gross refining margins (GRMs): GRMs for 1HFY08 were $ 6.26 per barrel up from US$ 5.74 per barrel in the corresponding period last year for Mumbai refinery. On the other hand, they stood at $ 6.14 per barrel for the first half this fiscal up from US$ 5.97 per barrel in the comparable period last year for the Visakh refinery.

Higher subsidies: Subsidies amounting to the tune of Rs 1.4 bn was claimed from the government in 2QFY08, marginally up from Rs 1.34 bn in the same period last year.

What to expect?
At the current prices of Rs 238, the stock trades at price to earnings ratio of 4.7 times its trailing twelve months earnings. While soaring crude prices and regulatory concerns will continue to impact the performance of the company, the steps taken, particularly in the refining side of the business is going to improve the business mix. Also, the company is taking various steps to cement its growth in the retail side of the marketing segment. Historically, IOC and BPCL have attracted premium valuations vis-ŗ-vis HPCL. However, with improving business mix and lower third party purchases going forward, this premium is set to diminish.

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