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HPCL: A loss making quarter - Views on News from Equitymaster
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HPCL: A loss making quarter
Dec 29, 2015

Hindustan Petroleum Corporation Ltd (HPCL) has announced results for the quarter ended September 2015. The company has reported sales decline of 18.6% YoY for the quarter and a loss of Rs 3.2 bn at the bottomline level. Here is our analysis of the results.

Performance summary

  • Topline declines by 18.6% YoY.
  • The market sales (including exports) for the quarter stood at 7.93 MMT, up 7.7% YoY.
  • The company incurred an operating loss of Rs 1.2 bn during the quarter.
  • The company reported a loss worth Rs 3.2 bn as compared to a profit of Rs 8.5 bn in the corresponding quarter last year.
  • The crude throughput for the quarter stood at 4.21 million tonnes (MT), down 6.2% YoY.
  • During the first six months, the subsidy from the Government on sale of PDS Kerosene and domestic LPG amounted to nil versus subsidy of Rs 3.7 bn in 1HFY15. The support from the Government stood at Rs 8.4 bn, down 79% YoY.
  • The discount from upstream segment stood at around Rs 3.8 bn, down 94.9% YoY.
  • The gross refining margin for the quarter stood at US$ 2.68 per barrel.

Financial summary

(Rs m) 2QFY15 2QFY16 Change 1HFY15 1HFY16 Change
Net Sales 516,115 420,036 -18.6% 1,107,849 937,240 -15.4%
Other operating income 555 687 23.7% 1196 1515.6 26.7%
Total Operating revenues 516,670 420,723 -18.6% 1,109,045 938,755 -15.4%
Expenditure 500,670 421,301 -15.9% 1,087,146 908,703 -16.4%
Operating profit (EBDITA) 15,445 -1,265 na 20,703 28,536 na
EBDITA margin (%) 3.0% -0.3%   1.9% 3.0%  
Other income 2,753 2,953 7.3% 4,732 5,262 11.2%
Interest 1,869 1,650 -11.7% 3,164 2,878 -9.1%
Depreciation 3,880 5,428 39.9% 9,777 12,936 32.3%
Profit before tax before exceptional items 13,004 -4,704 na 13,689 19,501 42.5%
Profit before tax margin (%) 2.5% -1.1%   1.2% 2.1%  
Tax 4,502 -1,499 na 4,727 6,825 44.4%
Effective tax rate (%) 34.6% 31.9%   34.5% 35.0%  
Profit after tax/(loss) 8,502 -3,205 na 8,962 12,675 41.4%
Net profit margin (%) 1.6% -0.8%   0.8% 1.4%  
No. of shares (m)         339  
Diluted earnings per share (Rs)*         91.7  
P/E ratio(x)*         9.2  

*On the basis of trailing 12 months


What has driven performance in 2QFY16?
  • Lower realizations in a scenario of weak crude prices led to a decline in the revenues during the quarter.
  • Soft GRMs and inventory losses worth around Rs 14 bn led to an operating loss of Rs 1.3 bn. As compared to a profit of Rs 15 bn in 2QFY15. The gross refining margin for the quarter stood at US$ 2.68 per barrel.
  • The company incurred a loss of Rs 3.2 bn at the bottomline level, mainly due to high inventory losses , forex loss worth and weak product cracks.
  • Cost breakup

    (Rs m) 2QFY15 2QFY16 Change 1HFY15 1HFY16 Change
    Raw materials 469,659 393,026 -16.3% 1,034,277 843,373 -18.5%
    % sales 91.0% 93.6%   93.4% 90.0%  
    Staff cost 5,699 5,164 -9.4% 12,343 11,505 -6.8%
    % sales 1.1% 1.2%   1.1% 1.2%  
    Other expenditure 25,312 23,110 -8.7% 40,526 53,825 32.8%
    % sales 4.9% 5.5%   3.7% 5.7%  
    Total costs 500,670 421,301 -15.9% 1,087,146 908,703 -16.4%
    % sales 97.0% 100.3%   98.1% 97.0%  
What to expect?

The company has incurred losses mainly due to inventory losses during the quarter. However, overall, this is a good phase for downstream companies with diesel deregulation and weakness in crude price leading to lower under recoveries. Direct benefit transfer is another fuel reform that is a key positive for downstream companies. Above factors are likely to lead to better working capital efficiencies.

The company is planning to invest more than Rs.200 bn to double the capacity of its Visakhapatnam refinery to 15 mtpa and Mumbai refinery to 10 mtpa by 2020 and upgrade existing ones. It is in the mid of significant capacity expansion that may put return ratios under pressure.

With this expansion, the company plans to narrow the gap between refining and marketing volumes. However, companies in the downstream sector need to be a little cautious of over supply of crude derivatives.

At current price of Rs 841, the stock is trading at around 9.2 times price to earnings (on a trailing 12 months basis) and 1.7 times on price to book value (Standalone) basis. The stock is up by around 50% since the beginning of the year and seems to be pricing in the benign scenario of fuel reforms. We recommend investors to avoid buying the stock at current price.

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