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  • Nov 14, 2013 - HPCL: Forex losses and under recoveries drag profits

HPCL: Forex losses and under recoveries drag profits
Nov 14, 2013

Hindustan Petroleum Corporation Ltd (HPCL) has announced the results for the second quarter ending September 2013. For the quarter, the company has reported 5.6% year on year (YoY) growth in sales and 86.3% YoY net loss at the bottomline level. Here is our analysis of the results.

Performance summary
  • For the quarter, sales were up 5.6% YoY. For half year ending September 2013 (1HFY14), HPCL reported 10.7% YoY growth in the revenues.
  • The operating profit for the quarter declined by 68.7% YoY with operating margins at 2.0% as compared to 6.6% in 2QFY13. For the half year, the operating profits stood at Rs 3.3 bn with operating margins at 0.3%, as compared to operating loss margins at 5.7% in 1HFY13.
  • The net profits for the quarter declined by 86.3% YoY with net profit margins at 0.6% as compared to 4.7% in 2QFY13. For the half year, HPCL booked net losses of Rs 11.4 bn, with net loss margins at 1.1%, as compared to net loss margin of 7.4% in 1HFY13.
  • The crude thruput for the quarter stood at 3.89 million tonnes (MT) versus 3.44 MT in 1QFY14 and 3.65 MT in 2QFY13. For the half year, the crude thruput stood at 7.33 MT, up from 7.23 MT in 1HFY13.
  • The market sales (including exports) for the quarter stood at 7.20 MT as compared to 7.91 MT in the preceding quarter and 7.18 MT in 2QFY13. For the half year, the market sales (including exports) stood at 15.11 MT, up 1.8% YoY
  • The average gross refining margins (GRMs) for the quarter stood at US$ 3.88 per barrel, up from US$ 2.58 in the preceding quarter (US$ 4.4 per barrel in 2QFY13). For the half year, the GRMs stood at US$ 3.27 per barrel, up from US$ 1.19 per barrel in 1HFY13.
  • For the quarter, HPCL faced under recovery burden of Rs 82.3 bn, of which around 47.5% was compensated by the upstream segment while around 50.1% of the under recoveries were compensated by the Government. Hence, the net under recoveries for the quarter stood at Rs 1.98 bn.
  • For the half year, HPCL incurred under recoveries stood at around Rs 140.6 bn. Of this, the subsidies from Government compensated for around 42% while discount from upstream compensated for around 53% of losses.


Standalone performance summary
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 491,298 518,602 5.6% 936,274 1,036,240 10.7%
Expenditure 458,858 508,460 10.8% 990,073 1,032,977 4.3%
Operating profit (EBDITA) 32,440 10,142 -68.7% -53,799 3,263 -106.1%
EBDITA margin (%) 6.6% 2.0%   -5.7% 0.3%  
Other income 2,941 2,435 -17.2% 5,067 4,476 -11.7%
Interest 7,200 3,962 -45.0% 11,002 8,630 -21.6%
Depreciation 4,910 5,426 10.5% 9,483 10,526 11.0%
Profit before tax before exceptional items 23,271 3,189 -86.3% -69,217 -11,416 nm
Profit before tax margin (%) 4.7% 0.6%   -7.4% -1.1%  
Tax 0 0 nm 0 0 nm
Profit after tax/(loss) 23,271 3,189 -86.3% -69,217 -11,416 nm
Net profit margin (%) 4.7% 0.6%   -7.4% -1.1%  
No. of shares (m)         339  
Diluted earnings per share (Rs)*         197  
P/E ratio(x)**         nm  
*On a trailing 12 months basis

What has driven performance in 2QFY14?
  • The revenues during the quarter were up by 5.6% YoY. This was due to improvement in market sales volumes and Government support to compensate for the loss on sales of sensitive petroleum products.

  • The operating profit margins declined to 2.0% during the quarter from 6.6% in 2QFY13. However, year on year comparison is irrelevant due to adhoc subsidy payments and discounts. The raw material cost (as a % of sales) increased to 91.9% during the quarter, up from 89.1% in 2QFY13. The average gross refining margins during the quarter declined to US$ 3.81 per barrel US$ 4.4 per barrel in 2QFY13. The discount from upstream companies compensated for around 50.1% of the under recoveries.

  • The net profits for the quarter declined by 86.3% YoY. The numbers are not strictly comparable due to adhoc under recovery compensation. Post the compensation from the Government and the upstream segment, the net under recoveries for HPCL stood at Rs 1.98 bn. HPCL also incurred a forex loss of Rs 1.5 bn during the quarter.

    Cost breakup
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw materials 437,867 476,528 8.8% 931,492 970,952 4.2%
    % sales 89.1% 91.9%   99.5% 93.7%  
    Staff cost 6,796 5,161 -24.1% 16,299 10,073 -38.2%
    % sales 1.4% 1.0%   1.7% 1.0%  
    Other expenditure 14,195 26,771 88.6% 42,281 51,952 22.9%
    % sales 2.9% 5.2%   4.5% 5.0%  
    Total costs 458,858 508,460 10.8% 990,073 1,032,977 4.3%
    % sales 93.4% 98.0%   105.7% 99.7%  
What to expect?
While lower crude prices and hike in the diesel prices have eased under recovery burden to some extent, rupee depreciation remains a major concern for the companies in the oil and gas segment. Further, in case export parity pricing mechanism is adopted, it will have adverse impact on realizations, At the current price, the stock of HPCL is trading at a trailing 12 months PE ratio of 8.1x (standalone).We maintain a 'Hold' recommendation on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation that no single stock comprises more than 5% of your portfolio.

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