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HPCL: Price revisions boost performance

Nov 19, 2002

In line with industry trend, Hindustan Petroleum Corporation Ltd. (HPCL) has reported sharp improvement in financial performance for quarter ended September '02. As mentioned in the BPCL quarterly report, administered pricing mechanism (APM) dismantling has yielded considerable gains for the industry. Marketing companies have revised petrol & diesel prices over the past five consecutive fortnights ending October 15, 2002.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net sales 98,415 109,128 10.9% 200,100 218,610 9.3%
Other Income 792 719 -9.2% 1,420 1,311 -7.7%
Expenditure 94,999 101,003 6.3% 192,841 207,194 7.4%
Operating Profit (EBDIT) 3,416 8,125 137.8% 7,259 11,416 57.3%
Operating Profit Margin (%) 3.5% 7.4%   3.6% 5.2%  
Interest 775 256 -67.0% 1,533 903 -41.1%
Depreciation 1,251 1,398 11.8% 2,444 2,769 13.3%
Profit before Tax 2,182 7,190 229.5% 4,703 9,054 92.5%
Tax 779 2,630 237.6% 1,680 3,328 98.1%
Profit after Tax/(Loss) 1,403 4,560 225.0% 3,023 5,726 89.4%
Net profit margin (%) 1.4% 4.2%   1.5% 2.6%  
No. of Shares 338.8 338.8   338.8 338.8  
Diluted Earnings per share* 16.6 53.8   17.8 33.8  
P/E Ratio         6.2  

Better topline performance, greater cost control and significant reduction in interest expense has facilitated a considerably higher rise in pre-tax profits, as compared to BPCL. In contrast to industry peer, despite similar refining yields, turnover of HPCL has been driven by realisations. Throughput and sales for quarter ended September '02 increased by 3.5% and 2.3% YoY respectively. Improvement in volumes is largely due to LPG, diesel, ATF and fuel oil. Gradual shift to natural gas, privatisation of IPCL and halt in operations at Nocil has impacted naphtha offtake of PSU refineries. Kerosene sales have also been impacted with companies pushing LPG as preferred domestic fuel. HPCL is among the larger lubricant players but has reported discouraging lubricant sales performance.

Higher utilisation rates has facilitated volumes growth while products purchased for re-sale have declined marginally. On the other hand, BPCL reported lower throughput and double-digit growth in products purchased for re-sale in September '02 quarter. Having said that, BPCL operates considerably above rated capacity and volumes are likely to materialise from re-sale products. Although products purchased for re-sale have declined, purchase value has increased by 15% YoY. Products purchased for re-sale are largely skewed towards erstwhile controlled products, which have supported blended refinery gate prices. APM dismantling, it seems, has led to more dynamic refinery gate pricing.

As mentioned earlier, improvement in realisations has led to expansion in margins. Having said that, similar to industry trend, the company has recorded inventory gains largely due to products purchased for re-sale. Also, included in margins is ad-hoc subsidy receivables from the Government amounting to Rs 5 bn for first six months on LPG and Kerosene. BPCL had reported subsidy receipts for first five months. Staff costs are down 30% YoY during the quarter.

Interest costs have been declining over the past six quarters. Softening interest rates and prompt receipt of subsidies is likely to have facilitated reduction in interest burden. With cooling in oil markets resulting in lower international petro product prices, domestic prices also have been reduced recently. Consequently, there could be a reversal in trading gains from inventory in the current quarter.

At the end of first quarter, the HPCL scrip was quoting at Rs 282. Currently, the scrip quotes at Rs 208 and is trading on a multiple of 6.2x 1HFY03 annualised earnings. Prior to build up of disinvestment expectations, HPCL historically traded in a band of 4x-6x earnings. With domestic industry recovering over the past year and automobile sector experiencing buoyancy, volumes are likely to register improvement. Adjustment in prices, which was not seen in 1QFY03, has considerably lifted operating margins. Consequently, we will re-look our numbers to factor in more dynamic pricing.

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