In the last one-year Hindustan Petroleum Corporation Ltd. (HPCL) has been losing its status as the most sought after oil stock to its younger cousin Bharat Petroleum (BPCL). This is clearly evident from the performance of both the stocks in the last one-year. BPCL has outperformed HPCL by 50.3%. However it is pertinent to mention here that HPCL on an absolute basis and in relative to BSE has given super returns in the last one-year.

The reason for the outperformance of BPCL is that it’s being perceived as more market savvy & dynamic, with a more transparent management and better brand equity. Other reasons, being HPCL specific like exposure in the loss making MRPL. While we believe that BPCL does have some better qualities, our recent meeting with HPCL brought to light the fact it matches BPCL in most of the qualities. It’s just that the perception of BPCL due to better corporate communication has improved.

Anyway keeping aside the comparison, we believe that HPCL has some exciting days ahead. With an able management at helm we think that company will be able to steer clear through some of the grey areas daunting the company right now. With this the premium between BPCL and HPCL would reduce as the stock would be re-rated. All in all we believe that the company can give some fantastic returns going forward.

HPCL was formed in 1974 on nationalization of ESSO India operations. The operations of Caltex were merged in 1976. With two refineries at Mumbai & Vizag, HPCL is currently is the second largest player in both the Indian oil sector as well as the highly competitive lubricants market. The government stake in HPCL reduced has also reduced to 51 % thus dispelling any possibility of any supply overhang.

The HPCL Fuels Refinery at Mumbai was started in 1954 with five processing units. Over the years, the refinery has been expanded to 5.5 MMT per annum. The total crude thruput in the year FY 2001 was 5.57MMT or equivalent to a capacity utilization of 101.4%. The refinery is self sufficient in its power requirements with its capacity power plant of 28 MW capacity.

The Lube Refinery was commissioned at Mumbai in 1969 with a capacity of 1,65,000 tonnes per annum. Since then it has been expanded to the present capacity of 3,35,000 tonnes per annum. It is one of the largest lube oil refineries in India and supplies more than 30% of India base oil requirement.

The Visakh Refinery on the East Coast of India was commissioned by the erstwhile Caltex Refining India limited, in 1957. The capacity of the refinery was recently expanded from 4.5 to 7.5 MMT per annum. The total crude thruput in the year FY 2001 was 6.41 MMT or equivalent to a capacity utilization of 101.7% (Part of the capacity expansion was completed during (FY 2001). The Visakh Refinery also has a power plant, which caters to the power requirements of Visakh Refinery.

HPCL is one of the only two companies in India to have its own product pipelines. The Mumbai-Pune product Pipeline is 161 kms long. It has a capacity of 3.67 MMTPA and is used for transportation of MS, SKO, HSD & LDO to the terminals at Vashi and Pune. The other Pipeline is from Visakhapatnam to Vijaywada is 350 kms long. It has capacity of 4.1 MMTPA being expanded to 5.4 MMTPA. The pipeline is also being extended to Secunderabad.

The company has around 4600 retail outlets all over India primarily engaged in marketing of Diesel & Petrol. It has a pan India network of 120 Terminals & depots tankages to feed these outlets. It also has 1607 LPG dealers spread all over India.

HPCL is one of the dominant players in all the major segments. It has market share of 27% in LPG, 24% in Retail, 16% in Bulk and 33% in Lubes.

During FY 2001, HPCL achieved total volume sales of 18.38 MMTA as compared to 17.49 MMT in FY 2000. The crude through put at the refineries was also higher at 11.98 MMT as compared to 10.55 MMT. Pipeline thruput was higher at 6.41 MMT as compared to 6.18 MMT.

For FY 01, HPCL recorded 43% increase in sales to Rs485.6bn from Rs338.3bn in the FY 2001. Other income grew by a phenomenal 262% to Rs4.64bn. The other income was higher due to Rs1.42bn collected as premium from Tatkal LPG connections & Rs1.48bn towards interest on amount receivables from the Oil pool account.

Total income as a result grew by 44.9% to Rs490.3bn in FY 2001 as compared to Rs339.5bn in FY 2001. Expenditure increased by 45.5% to Rs468.9bn as compared to Rs322.3bn. The Operating profit was up only 4.9% to Rs16.76bn as compared to Rs15.99bn. One of the main reasons for the slow rise was the huge increase in staff cost by 30% & decline in Refinery margins on account of rise in crude oil prices. The huge increase in Staff cost in the quarter was on account of provision of LTS for Non-management staff of the marketing unit.

Interest costs have risen sharply by 157% to Rs3.87bn from Rs691mn. Depreciation was higher by 42% to Rs4.33bn. The increase in interest costs was mainly due to a sharp increase in dues outstanding from OCC on account of very oil pool deficit. The increase in depreciation was on account of commissioning of the DHDS project, expansion of refinery capacity & sharp increase in number of cylinders purchased. This was because the corporation has released a record number of new LPG connections the current year.

The provision for taxation declined by 7.4% to Rs2.32bn. The net profit was higher by 2.89% to Rs10.87bn from Rs10.57bn. The OPM is down from 4.73% to 3.45%. The annualized EPS stands at Rs32.12 as compared to Rs31.22.

MRPL is joint venture between the A.V. Birla group & HPCL. Both of them have 37% equity each in the MRPL. MRPL has a refining capacity of 9 MTPA. However the company is making huge losses due to high debt equity ration 5:1. The A.V. Birla group as part of the group strategy has decided to exit MRPL. HPCL has the first right of refusal for the Birla stake. HPCL has appointed SBI caps and Arthur Anderson as consultants to make a valuation of the MRPL. The Birlas are however also talking to IOC & Kuwait Petroleum for selling their stake. This is because IOC does not have a refinery in south while KPC by buying out MRPL would get access to marketing rights. The situation is expected to become clear in a couple of months. However we do not foresee any major financial implication on its profitability due to the MRPL tangle.

With the deregulation of ATF, only four products viz. Petrol, Diesel, Kerosene & LPG are under government control. According to the company the marketing deregulation would see through from 1^st April 2002. This is because the government has stuck to its program and achieved all the major milestones. The latest one being the deregulation of ATF. Going by the experience in the previous case when the products like Naphtha, Bitumen, furnace oil, lubricants etc were being deregulated the company is expecting its marketing margins in these products to shoot up on an average by three times from the current margins. More than 55% of the company’s PBIT is derived from controlled products. This itself should add around Rs5bn to its bottomline.

HPCL already own close to 56% of its 4500 retail outlets, thus dispelling the fears that it may be prone to poaching by the private players. In metro’s which are the major thrust areas the ownership more 90%. The company plans to increase the owned outlets to 65% by FY 2002. As far as investment goes, HPCL has already invested more than 3bn in refurbishing these outlets. It plans to spend another Rs3bn in the next two years towards improving the services at the outlets.

HPCL has laid a major emphasis on increasing the non-oil income from retail outlets. Towards this the company has tied up with many leading players for offering services like ATMs, fast food centers, delivery pick up points, convenience stores, cyber cafes etc. These services not only help increase other income but also result in increase in volume sales of oil products. This is in line with trend in international markets where big retail chains earn more than 30 – 40% of their profits from non-oil activities. HPCL foresees that from three years from now, this activity should start making significant chunk of its profits.

The company is going ahead with its Bhatinda Refinery in Punjab. The 9 MTPA project is being set up at a cost of Rs980bn. The project includes besides the refinery a 140 MW captive power plant, a port at Mundra in Gujarat for importing crude oil and a crude oil pipeline for transporting the crude oil from the import terminal to the jetty. The company expects to commission the project by June 2005.

The refinery with a lost of tax incentives will be one of the most modern and competitive even by global standards. The Refinery is coming up in the product deficit northern region. The growth in the northern region is also better as compared to other parts of India. The company currently does not have any refinery in this region and hence the refinery would help service the demand of the northern region.

The company seems to be on the right track as far as the preparation for the oil deregulation is concerned. The thrust on the marketing should help it in good stead when the competition in the retail outlets becomes fierce.

The one time increase in marketing margins would give a huge boost to FY 2003 profits. After which from FY 2004 onwards, the other non-oil income should start to chip in. The investment in Bhatinda Refinery may look unattractive on standalone basis; but it has to be seen in light of other logistics problems in India where it would be very difficult to sustain long-term imports. Hence the margins of Refinery should not be viewed on a stand-alone basis but in conjunction with the marketing margins. The stock is currently quoting at Rs158 a P/E of 4.9 times its FY 01 earnings. We feel that at the current price the stock is undervalued and due for a re-rating. Hence investment at current levels should yield decent returns in the medium term perspective.

Team 5 Paisa

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