HPCL: Same old story

High crude oil costs proved to be a bane

Hindustan Petroleum Corporation Ltd's performance in the March 2007 quarter, like other oil marketing companies, was affected by its inability to pass on higher crude oil costs to its customers.

Analysts also highlight a high base effect in the March 2006 quarter, owing to HPCL's receipt of oil bonds worth Rs 2344.8 crore from the Central government, which led to a lacklustre performance in Q4 FY07.

As a result, operating profit declined 47.8 per cent y-o-y to Rs 1,025.1 crore in Q4 FY 07 compared with 5.15 per cent growth in net sales to Rs 21,849.5 crore.

Operating profit margin also declined 475 basis points y-o-y to 4.7 per cent in the last quarter. Oil marketing company BPCL's operating profit margins also declined 320 basis points y-o-y to 5.3 per cent in Q4 FY 07.

Meanwhile, HPCL's market sales (including exports) amounted to 5.61 million tonne in the last quarter, a growth of 10.9 per cent y-o-y.

As per the subsidy sharing formula, upstream players' (ONGC and GAIL) share of subsidy burden stood at Rs 1143.8 crore in Q4 FY07 compared with Rs 1180.81 crore a year earlier. In addition, HPCL received oil bonds worth Rs 997.9 crore in the last quarter.

A small cushion for HPCL's margins was provided by higher gross refining margins "" it was $4.78 a barrel in FY07 for its Mumbai refinery compared with $3.22 a barrel a year earlier. The company's throughput in its refinery division was 4.21 million tonne in Q4 FY07 compared with 4.11 million tonne a year earlier.

At Rs 274, the stock trades at 6.5 times estimated FY08 earnings, given the uncertainty regarding its ability to pass on higher global crude oil costs to end customers.

Strides Arcolab: Grand buyout

With the acquisition of Grandix Pharmaceuticals, Strides Arcolab, will gain domestic presence, which it has lacked so far. At two times FY06 sales and about nine times EBITDA (earnings before interest, tax and depreciation), the Rs 100-crore acquisition does not seem expensive as the sales growth in FY07 is expected to be 30 per cent.

The formulations player Strides is strong in Latin America, Africa and has also entered the regulated markets of the US and Europe.

According to the management, the company has focused its attention on Asia in recent times, and had acquired Singapore-based generic player Drug Houses of Australia (Asia) last September.

Grandix, estimated to have revenues of Rs 63 crore in FY07, will provide Strides a foothold in the domestic formulations market. Strides has the financial muscle to expand Grandix's presence, from south to across the country. Last week, it completed a $100 million FCCB issue.

In the March 2007 quarter, though Strides Arcolab's consolidated sales grew 22 per cent, its operating profit growth was slower at 4.4 per cent. As a result, its operating margin was down 270 basis points to 16.5 per cent.

But going forward, analysts are bullish on its product filings in the US and that it has a wide product portfolio with presence in over 50 countries. The stock trades at around 20 times estimated FY08 earnings.

Cummins: Growth engine

For Cummins India, a manufacturer of power generation and industrial engines, FY07 was a reasonably good year, thanks to strong demand conditions from its key user industries like the domestic industrial sector.

Its growth momentum in the previous year was also provided by its exports which grew 14 per cent y-o-y and contributed nearly 34 per cent to its sales.

As a result, consolidated operating profit (excluding other income) grew 36.6 per cent y-o-y to Rs 345.4 crore in the previous financial year, while net sales improved 19.6 per cent to Rs 2122.8 crore.

Consolidated operating profit margin also improved 210 basis points to 16.3 per cent in FY07.

Meanwhile, in Q4 FY07, operating margin grew 130 basis points y-o-y to 16.3 per cent. While domestic demand is expected to remain strong, the underlying concern for Cummins India is the appreciating value of the rupee and its impact on export margins.

It is understood that the US parent also has the option of sourcing equipment from other emerging markets such as China, which could hit export growth of Cummins India. At Rs 316, the stock trades at 20 times estimated FY08 earnings, given the strong investor interest for stocks in the capex sector.