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HPCL: Government support boosts profit - Views on News from Equitymaster

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HPCL: Government support boosts profit
Nov 16, 2010

HPCL has announced its 2QFY11 results. The company has reported a 25% YoY growth in sales and a positive bottom line. Here is our analysis of the results.

Performance summary
  • Topline increases by 25% YoY in 2QFY11 due to growth of 3.6% YoY in the sale of petroleum products.
  • EBITDA margin during the quarter rises to 8% on the back of better cost management
  • Interest costs decline by 12% YoY during the quarter.
  • Bottomline turns positive, yielding net profit margin of 6.8% in 2QFY11 vs. a loss margin of 0.6% (YoY) due to Government support.

Standalone financial snapshot
(Rs m) 2QFY 10 2QFY 11 Change 1HFY 10 2HFY 11 Change
Net sales 246,290 308,702 25.3% 490,652 601,717 22.6%
Expenditure 244,569 283,875 16.1% 475,669 592,243 24.5%
Operating profit (EBDITA) 1,721 24,828 1342.6% 14,983 9,474 -36.8%
EBDITA margin (%) 0.70% 8.04%   3.05% 1.57%  
Other income 1,512 2,213 46.4% 3,530 3,866 9.5%
Interest 2,493 2,200 -11.8% 5,195 4,168 -19.8%
Depreciation 2,833 3,234 14.2% 5,462 6,408 17.3%
Profit before tax -2,093 21,608   7,855 2,763 -64.8%
Tax -727 712   2730 712 -73.9%
Profit after tax/(loss) -1,367 20,896   5,125 2,051 -60.0%
Net profit margin (%) -0.60% 6.80%   1.04% 0.34%  
No. of shares (m) 339 339   339 339  
Diluted earnings per share (Rs)*   29.4     29.3  
*On trailing twelve months earnings

What has driven performance in 2QFY11?
  • Despite lower gross refining margins of USD 2.66 per barrel vs. USD 3.72 (QoQ) and averaging USD 3.21 per barrel for 1HFY11 versus USD 3.79 in 1HFY10, EBITDA margins in 2QFY11 turned positive mainly on account of efficient raw material costs management which declined by 7% (as a percentage of sales).

  • Though throughput declined to 6.33 MT in 1HFY11 vs. 8.12 MT (YoY) due to planned shutdowns, the domestic sales of petroleum products increased to 12.39 MT (up 3.6%YoY) vs. industry average growth of 1.7% in 1HFY11. The sales of petrol increased by 13% and that of diesel by 8.4%YoY in 1HFY11.

    Cost break-up
    (Rs m) 2QFY10 2QFY11 Change
    Raw materials 227,732 264,633 16.20%
    % sales 92.47% 85.72%  
    Staff cost 1,631 4,406 170.10%
    % sales 0.66% 1.43%  
    Other expenditure 15,208 14,834 -2.50%
    % sales 6.17% 4.81%  
    Total cost 244,571 283,873 16.10%
    % sales 99.30% 91.96%  

  • Interest costs declined 12% YoY due to effective treasury management and ample liquidity in the market.

  • While Government provided a support Rs INR 28.3 bn, HPCL had to absorb under-recoveries on sale of sensitive petroleum products amounting to Rs 17.2 bn in H1FY11.

  • Other income increased by 46% YoY during 2QFY11 which strengthened the bottomline.

What to expect?
At the current price of Rs 461, the stock trades at a multiple of 8 times our estimated FY13 earnings. We continue to advise caution on the stock as interest costs and regulatory concerns will continue to impact the short-term business performance of the company, while poor return on incremental capital expenditure will impact the long-term performance of the company.

Although the government has taken steps towards the deregulation of petrol prices, given their ‘aam aadmi’ mandate and the political opposition to such a move, it seems unlikely that a genuine structural change will actually be sustained. Moreover, the government’s resolve for market determined prices will be severely tested once crude oil prices begin their upward move from current levels.

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