BPCL steps on the gas

CORPORATE SHOOTOUT

Of the two refining and marketing heavyweights, Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL), the latter has almost always been the market's preferred pick.

Its agility and drive are reflected in its higher marketshares in the retail segment. Which is why BPCL commands better valuations at a price earning ratio (PER) of 8.5 versus HPCL's 6.8.

The market caps are similar, given that HPCL's equity is higher at Rs 338 crore compared to BPCL's Rs 300 crore, but BPCL's market cap to sales is higher.

BPCL's valuations might have been even better had it not been for the concerns on underrecoveries of subsidies and the inability to raise retail, both of which impact BPCL more than they do HPCL.

BPCL's Return on Equity (RoE) however, is higher at around 31.8 per cent compared with HPCL's 22.5 per cent.

As for the Return on Capital Employed (ROCE), HPCL's was lower at 29.9 per cent in the 2004 financial year compared with 31.2 per cent for BPCL. This means that BPCL was able to utilise its funds more efficiently. In the 2004 financial year, net sales were up 6 per cent for HPCL and 11 per cent for BPCL.

The trend was maintained in the first quarter of 2005, when net sales were up 11 per cent for HPCL, while for BPCL they were up 17 per cent. So BPCL is clearly growing in sales at a better pace and in the first quarter has actually gained in marketshare.

However, HPCL had managed stronger earnings before interest depreciation tax and amortisation (EBITDA) margins last year.

HPCL's strengths clearly lie in higher refining capacities and the modern plant it has at Vizag. Moreover, margins were bolstered by the strong gross refining margins (GRMs).

The increase in throughput in the financial year 2004 was higher at 13.7 million metric tonnes (mmt), an increase of 6 per cent whereas for BPCL it was just 0.6 per cent. Again, because it has adequate capacities, HPCL buys less than BPCL, its margins are protected.

Besides, HPCL's lubes sales fetch it very good profits. Refining margins have been superior for HPCL in the first quarter of the financial year 2005, with Vizag earning $7.3 versus BPCL's Bombay refinery earning $5.17. BPCL's refining margins will continue to lag behind those of HPCL's till its upgradation and debottlenecking is completed in October.

BPCL is clearly the better marketer and logistics manager.

Both firms have around 5,000 retail outlets each, yet BPCL's marketshare for motor spirit and high speed diesel is far higher at 28 per cent compared with 23 per cent for HPCL.

More pertinently, throughput per outlet is also higher for BPCL.With products like 'Speed' and 'Pure for Sure', BPCL has been successful with its branding strategies for petrol and innovations like fancy petrol pumps housing convenience stores.

Looking ahead at growth prospects, BPCL's capacity will increase by 33 per cent post expansion, resulting in better yields and gross refining margins. HPCL's capacity will go up by 24 per cent .

While BPCL will enjoy the full benefit of its capacity expansion in the financial year 2006, HPCL will reap the full benefits of its bigger capacity only in financial year 2007.

In sum, with the higher capacity kicking in and retail margins expected to improve, BPCL should maintain its edge over its competitor.