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HPCL: A strong quarter - Views on News from Equitymaster
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HPCL: A strong quarter
Nov 18, 2014

Hindustan Petroleum Corporation Ltd (HPCL) has announced the results for the quarter ended September 2014. The company has reported flat topline and net profit growth of 167% YoY at the bottomline level. Here is our analysis of the results.

Performance summary
  • For the quarter, sales were down 0.4% YoY. For the half year, net sales were up 7.0% YoY.
  • The company reported operating profit growth of 61.0% YoY for the quarter, with margins at 3.1% up from 1.9% in the corresponding quarter last year. For the half year, operating profit was up 9 times (YoY basis) with operating profit margins at 2.0% versus 0.2% in 1HFY14.
  • The net profits for the quarter grew 167%, with net profit margin at 1.6%, as compared to margin of 0.6% in 2QFY14.
  • The average gross refining margins (GRMs) for the half year declined to US$ 2.09 per barrel, from US$ 3.27 per barrel in 1HFY14.
  • The subsidies on PDS kerosene and domestic LPG amounted to Rs 3.7 bn in 1HFY15 (up 16% YoY)
  • The crude throughput for the quarter stood at 4.49 million tonnes (MT), versus 3.89 MT in 2QFY14 and 3.28 MT in the preceding quarter.
  • The market sales (including exports) for the quarter came in at 7.36 MT, versus 7.2 MT in 2QFY14 and 8.34 MT in the preceding quarter.

(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Total Operating revenues 519,037 516,887 -0.4% 1,036,675 1,109,045 7.0%
Expenditure 509,097 500,887 -1.6% 1,034,261 1,087,146 5.1%
Operating profit (EBDITA) 9,940 16,001 61.0% 2,415 21,899 806.9%
EBDITA margin (%) 1.9% 3.1%   0.2% 2.0%  
Other income 2,437 2,1753 13.0% 4,479 4,732 5.6%
Interest 3,762 1,869 -50.3% 7,783 3,164 -59.3%
Depreciation 5,426 3,880 -28.5% 10,526 9,777 -7.1%
Profit before tax before exceptional items 3,189 13,004 307.8% -11,416 13,689 NM
Profit before tax margin (%) 0.6% 2.5%   -1.1% 1.2%  
Tax 0 4,502   0 4,727  
Profit after tax/(loss) 3,189 8,502 166.6% -11,416 8,962 NM
Net profit margin (%) 0.6% 1.6%   -1.1% 0.8%  
No. of shares (m)         339  
Diluted earnings per share (Rs)*         111.4  
P/E ratio(x)*         4.9  
*On a trailing 12 months basis

What has driven performance in 2HFY15?
  • HPCL reported flat volume growth for the quarter. While sales volumes were marginally up, there was a sequential decline as September is a seasonally weak quarter.

  • The operating margins for the quarter improved to 3.1% from 1.9% in the corresponding quarter last year. This was mainly on account of lower input cost and other expenses (both as a % of net sales). The average gross margins came lower in line with benchmark GRMs.

    Cost breakup
    (Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Raw materials 476,528 469,659 -1.4% 970,952 1,034,277 6.5%
    % sales 91.8% 90.9%   93.7% 93.3%  
    Staff cost 5,161 5,699 10.4% 10,073 12,343 22.5%
    % sales 1.0% 1.1%   1.0% 1.1%  
    Other expenditure 27,409 25,529 -6.9% 53,235 40,526 -23.9%
    % sales 5.3% 4.9%   5.1% 3.7%  
    Total costs 509,097 500,887 -1.6% 1,034,261 1,087,146 5.1%
    % sales 98.1% 96.9%   99.8% 98.0%  

  • Decline in interest costs and subsidy support from the Government on PDS kerosene and domestic LPG supported the growth in the bottomline. The company had to absorb very low under recoveries of Rs 85 m (gross under recoveries at Rs 51.6 bn, with upstream and Government sharing burden of 72.7% and 27.2% respectively).
What to expect?
While the diesel deregulation will help OMCs in better working capital management and lower interest costs, adhoc subsidy sharing mechanism remains a concern. Besides, HPCL 's high debt to equity ratio is beyond our comfort levels.

The Government has increased the excise duty on petrol and diesel. This will reduce the over recoveries that OMCs were making on the sale of petrol and diesel. However, recent decline in the crude prices has positively impacted the stock prices of OMCs. The stock is currently trading at a trailing 12 months price to earnings ratio of 4.9 times. At current valuation, the stock seems to be pricing in all positives and ignoring the likely competition from the private players in fuel retailing space. We suggest investors not to buy the stock at current prices.

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