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HPCL: In Expansion Mode

Business World Oct 01, 2015

HPCL plans to spend Rs 2,000 crore overseas through Prize Petroleum Company With a strong balance sheet and substantially reduced debt, Hindustan Petroleum Corporation (HPCL) — the country’s third-largest oil marketer — is scouting for acquisition opportunities overseas to expand its production base. The company struck such a deal in Australia last year. HPCL, according to sources familiar with the development, plans to spend at least $300 million (about Rs 2,000 crore) for a stake in an active oil and gas field through its exploration and development unit, Prize Petroleum Company. The decision is well timed: the recent slump in crude prices has eroded the value of production assets, making them attractive acquisition targets abroad. “We have recently acquired a production field in Australia, and are looking for some more opportunities for similar acquisitions in future,” executive director for corporate finance J. Ramaswamy said recently. HPCL’s balance sheet is strengthened as debt is down 47 per cent, from Rs 32,400 crore in 2012-13 to Rs 17,000 crore in 2014-15. The company has replaced high-cost debt with low-cost foreign currency debt. Recent fuel reforms have helped reduce working capital loans. Industry analysts say all this adds up to a safer financial position, enabling HPCL to consider acquisitions and heavy capital expenditure. While the stock has done well over the past few quarters, its earning per share ratio has been less than impressive, due to challenging market conditions. However, sector analyst Deepak Shenoy of Capitalmind says HPCL is still a good stock. “As we go forward, the lower crude price and the fact that the oil companies such as HPCL and BPCL haven’t passed all of it on to us, or even despite the excise duty changes that will show up in their results, over time they will get re-rated. But in the short-term, they may just be in for a correction, largely because of the larger market, which will see a lot of volatility. In the longer term they would still be on the buy radar,” he noted in a recent report. A report from brokerage Emkay Global notes that with its current debt/equity ratio, HPCL could easily fund its future capex, partly through internal accruals and partly by raising long-term foreign currency loans at competitive rates. HPCL got a long-term foreign-currency Issuer Default Rating of ‘BBB-’ with a stable outlook from Fitch Ratings during the first quarter of the current financial year. This is investment grade, which is on par with India’s sovereign rating. In the first quarter of the current financial year, HPCL registered gross sales of Rs 54,802 crore. Domestic sales of petroleum products increased to 8.46 MT, registering a growth of five per cent over the first quarter of the previous year — better than the industry’s average growth rate of 2.7 per cent. Sales of petrol increased by 12.9 per cent, aviation turbine fuel by 20.1 per cent, and lubricants by 58.6 per cent over the same period a year ago. The company said the increase in profit was primarily because of higher refining margins, inventory gains, and increased refining throughput and domestic market sales, compared to the corresponding quarter last year. Chairperson Nishi Vasudeva noted in her annual message to shareholders that logistics remained the critical dimension in marketing. “The primary distribution infrastructure of your company has been further strengthened during the year,” she added, citing  the commissioning of new depots and revamping of facilities. For instance, HPCL commissioned an LPG Plant at Yediyur in Karnataka’s Tumkur district. This plant has the world’s largest LPG filling system, with a 72-point Flexspeed carousel and a production capacity of 4,200 cylinders per hour.  Three new product pipelines are under implementation at Rewari, Uran, and Mangalore. —  C.H. Unnikrishnan (This story was published in BW | Businessworld Issue Dated 19-10-2015)