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Raghuvir Srinivasan

A HPCL outlet... Strong oil prices have helped boost margins.

COMING off an exceptional period of high oil prices and strong margins, Hindustan Petroleum's earnings growth of 95 per cent in 2002-03 is nothing extraordinary. The fourth quarter ended March 2003 was particularly good for oil refining companies as global oil prices shot past the $30 per barrel mark and product prices soared upwards in accompaniment.

Thanks to this, refining companies enjoyed exceptionally high margins; Hindustan Petroleum's refining margin at its Visakh refinery zoomed to $4.4 per barrel in 2002-03 from $1.7 per barrel in 2001-02, while at its Mumbai refinery the margin rose to $2.8 per barrel from $1.8 per barrel in the same period.

The bottomline clearly reflects this improvement in the margin even as inventory gains have also made a major positive contribution. The inventory of products produced from crude sourced at lower prices was liquidated at higher relative prices.

This is a double-edged sword as during a regime of falling oil prices, the refining company will be forced to liquidate its inventory at prices lower than the value attached to it.

The freeing of the industry and the consequent healthy cash flows is also reflected in the finance costs of Hindustan Petroleum; interest cost has dropped by 60 per cent and 48 per cent respectively during the fourth quarter and the whole of 2002-03 respectively.

Though turnover in value terms was up 22 per cent at Rs 54,165 crore during 2002-03, sales in volume terms grew by just 4.5 per cent to 18.84 million tonnes. The top-line growth is evidently a factor of higher realisations rather than volume growth.

And therein lies the seed of trouble for the first quarter of 2003-04 as oil prices have been relatively soft and are showing a declining trend.

Hindustan Petroleum, as indeed the other refining companies, could see their margins erode in the first quarter as product prices have fallen more than crude oil price. Indian Oil Corporation is on record that its refining margins halved during the April-June 2003 quarter; Hindustan Petroleum cannot be an exception to this trend.

Besides, the company may also have to contend with inventory losses with product prices falling sharply. Along with its peers, Hindustan Petroleum was also asked to hold a higher inventory during the fourth quarter of the last fiscal by the government following the Iraq invasion. The company may have been forced to liquidate this inventory at lower prices during the first quarter, leading to trading losses.

If this was not enough, the Government's soft approach on the issue of subsidy on LPG and kerosene may also hit Hindustan Petroleum's bottomline in the first quarter.

The company, like its refining peers, has been forced to absorb a part of the subsidy. Indications, therefore, are that the first quarter may not be as resounding in earnings growth as the immediately preceding one.

The stock has been ruling steady at around Rs 350 in recent times even as those of peers, Indian Oil and Bharat Petroleum, saw a sharp rise.

The steady undercurrent in the Hindustan Petroleum stock could continue so long as it remains in the radar screen for privatisation. Indeed, there may be a fresh rally if the process gathers steam, as the value attached to the company by the prospective bidders is likely to be considerably higher than the prevailing market valuation.

Shareholders can continue to hold the stock while fresh buying can await the resumption of the privatisation process that now appears to be on the slow track.

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