Financial Daily from THE HINDU group of publications
Sunday, Jun 02, 2002
Markets - Recommendation
HPCL: Hold/Buy on declines
A STRONG performance in the fourth quarter has bailed out Hindustan Petroleum Corporation Ltd (HPCL) for fiscal 2001-02.
But for the sharp rise in earnings during the January-March 2002 quarter, HPCL would have reported a much worse performance than the 27.57 per cent fall in earnings for 2001-02.
The net earnings of Rs 424.90 crore in the fourth quarter is higher than that registered in the first three quarters taken together (Rs 363.07 crore) and accounts for almost 54 per cent of the total earnings for 2001-02. The good performance in the fourth quarter appears to be the result of a conscious control on operating costs, a rise in refining margins and an improvement in the cash flows following the receipt of Rs 1,800 crore due from the Oil Coordination Committee.
It is notable that HPCL has managed a substantial rise in its bottomline despite a 12.27 per cent fall in net sales and a significantly lower contribution from `other income', which fell by 71.25 per cent to Rs 83.29 crore during the quarter.
Costs have dropped across the board. Staff cost is down 27.41 per cent at Rs 198.43 crore, while interest charge is lower by 27.69 per cent at Rs 70.51 crore.
That there was a significant rise in overall operating efficiencies is evident from the fact that HPCL's operating margin shot up to 7.28 per cent from 2.33 per cent in the fourth quarter of 2000-01.
This is also borne out by the rise in refining margins at a time when global crude oil prices have been on the upswing and domestic product prices have remained unmoved.
Margins rose significantly in the Vizag refinery, up to $1.7 per barrel from $1.2 a barrel, while at the Mumbai refinery it moved up from $1.75 to $1.81 per barrel.
The company also appears to have purchased a lower quantum of products from the other refiners for resale. Given the static consumer prices and the rising crude oil prices, HPCL was sensible to not expose itself to the market more than what was necessary.
It also cut down on its crude throughput at the Vizag refinery to rein in the negative margins on products such as petrol, diesel and furnace oil.
HPCL appears to have been active on the retail front, adding more outlets and increasing the company-owned ones. The latter now accounts for 67 per cent of its total outlets compared to about 65 per cent for Bharat Petroleum and around 40 per cent for Indian Oil Corporation.
In the deregulated market, company ownership of retail outlets gains importance as it prevents competitors from buying out dealers. On this count, HPCL appears to be gradually inching into the zone of comfort.
The outlook for the immediate future appears to be uncertain for HPCL as indeed for the other oil refining and marketing companies.
The oil companies have held on to product prices even in the free market, following instructions from the government. But this cannot continue indefinitely as global crude oil prices are still strong and are expected to remain that way in the near term. The oil companies could run into problems if the government does not permit them soon to revise product prices. This may ultimately affect the valuations of these companies, two of which (BPCL and HPCL) are on the privatisation list.
HPCL stock's price movements in recent times have been driven by the prospect of privatisation of the company. It started rising soon after the Government put it on the block for sale but, in recent times, it has dropped sharply following uncertainties on this front.
On fundamental factors alone, shareholders can continue to hold on to their stock, while fresh acquisition can be considered at declines or when news on the privatisation front becomes definitive.
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