HPCL: Bleak future

Refiner's botttomline hinges on government's oil bonds.

HPCL reported a lacklustre performance in the September 2007 quarter due to its inability to raise retail prices of petroleum products, even global crude oil prices kept surging.

The company has accounted for Rs 2,355.54 crore of oil bonds from the Centre in the second quarter of FY08 compared with Rs 2,906 crore received a year earlier.

HPCL's operating profit declined 22.5 per cent y-o-y to Rs 1,317.6 crore, while its net sales (including oil bonds) fell 0.5 per cent to Rs 24,234.4 crore. Its operating profit margin also declined 160 basis points y-o-y to 5.4 per cent in the second quarter.

Meanwhile, upstream oil players such as ONGC and GAIL provided Rs 936 crore to HPCL in the September 2007 quarter compared with Rs 1,229 crore a year earlier, according to the subsidy-sharing formula.

An improved performance of its refinery division provided a small cushion to HPCL's operating margin. Its refinery crude oil throughput was 4.26 million tonnes in the September 2007 quarter compared with 4.16 million tonnes in the year-ago period.

Its gross refining margins (GRMs) at the Mumbai refinery were $6.26 a barrel in the first half of FY08 compared with $5.74 a barrel a year earlier. The regional benchmark, the Singapore refining margin, was $6.4 a barrel in the September 2007 quarter.

With the government being reluctant to raise petroleum product prices, the operating environment for HPCL is not expected to improve. As a result, HPCL will have to rely on the remaining oil bonds that it is entitled to receive in the second half of FY08 and subsidy-sharing by upstream players.

At Rs 238, the stock trades at 5.8 times estimated FY08 earnings and is likely to be an underperformer.

Maruti Suzuki: In top gear

A couple of good products and some innovative marketing strategies have helped Maruti Suzuki post excellent topline numbers during the September 2007 quarter.

It has demonstrated strong pricing power in a weak market by posting a net sales increase of 33 per cent y-o-y to Rs 4,547 crore, while the volume growth in the quarter was lower at 21.3 per cent.

Maruti, a 54 per cent subsidiary of Suzuki, has been the market leader in the passenger car segment for about a decade now and currently commands a share of over 52 per cent.

The runaway success of its Swift diesel, launched late last year, and the sedan SX4, launched in the June quarter, have aided the company's performance.

However, higher raw material costs have continued to depress the operating profit margin, which fell by 80 basis points y-o-y and 150 basis points q-o-q to 13.1 per cent. The strong net profit growth of 27 per cent to Rs 467 crore was helped to some extent by a higher other income.

Maruti should continue its good run, though capacity constraints at the Manesar plant, which is running at a utilisation of 120 per cent, could cap volumes.

As a result, the growth in the average selling price, which has been treading upwards for the last few quarters, may taper off. A better mix of more alternate fuel vehicles and sedans has helped drive up the average selling price.

At the current price of Rs 1,188, the stock trades at just about 18 times estimated FY08 earnings and under 16 times FY09 earnings. The price factors in all near-term upsides from better volumes, an improved product mix and stable commodity prices.

With contributions from Amriteshwar Mathur and Shobhana Subramanian