HPCL: Tough refining business, limited govt aid may dent profit

Government’s support, a jump in other income and a reduced interest burden helped Hindustan Petroleum (HPCL) post a tiny profit for the December 2009 quarter. Economic difficulties eroded margins in its refining business, while its marketing operations continued to incur losses.

The government’s promised aid of Rs 1,899 crore for the nine months ended December 2009 was entirely booked as revenues in the December quarter. Still the company’s operating profit was 33% lower compared with the year-ago period.

Other income saw a three-fold rise to Rs 225 crore due to a jump in interest on oil bonds. The company is currently carrying nearly Rs 9,600 crore worth of oil bonds, which is substantially higher against the year-ago period. A 72% fall in interest burden to Rs 220 crore also helped. As a result, the company posted a tiny profit at the pre-tax and post-tax level compared with losses in the year-ago period.

For the second quarter in a row, the company reported lower refinery throughput, although the company’s sales continued to swell. Higher sales helped the company increase its trading activities. In fact, during the December 2009 quarter, nearly 44% of HPCL’s sales came from products sourced from other refiners, and just 56% from its own refineries.

In a weak market, its shares ended 2% lower at Rs 344.25 on BSE before the results were announced. This is just around 2.1 times its per share earnings for the past 12 months and 1.1 times its book value for FY09. Such low valuations are a result of the company’s inability to control its profitability.

The outlook for the March 2010 quarter is not encouraging, given the weakness in the refining sector and limited support by the government for marketing losses.

HPCL had posted a net profit of Rs 5,104 crore for the March 2009 quarter, and is expected record a significant fall in March 2010. Unless some oil sector reforms are implemented, no clarity can emerge on the company’s future prospects.