BPCL versus HPCL: Which is better - II
Apr 10, 2012

As discussed in the previous article, BPCL comes across as more self reliant, less sensitive to external factors and better diversified along the value chain as compared to HPCL. Let us see how the companies fare on financials and valuations front.

On ‘Financial’ front

Since both Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) companies are operating under a highly regulatory scenario, return ratios are not of much help in determining the better player. As seen from the charts above, BPCL has consistently performed better at the operating and net profit. Though the gap has narrowed down in the last few years, we believe BPCL to remain ahead of HPCL on this front in the future. This is because we expect BPCL to earn better refining margins once the complex refineries (that can process less price high sulphur crude) that it has invested (Bina and expansion of Kochi refinery) start operations in full swing. This will help it to improve EBIDA margins, provided other factors remain constant. Also, at net earnings level, we expect BPCL to perform better going forward due to better self sufficiency and lesser leverage levels (implying lesser financial costs).

Comparing the two on Returns on Assets (RoA) criteria, both the companies seem to be very competitive. While BPCL seems lagging behind HPCL in offering returns on Equity Capital, we believe it will be unfair to compare the two on this parameter since both the companies operate at different leverage levels. In the last two years, the situation of HPCL has worsened. While BPCL has lowered down its leverage from 1.8 in FY10 to 1.57 in FY11, HPCL’s debt to equity has gone up from 2.0 to 2.4

The rising debt levels in these times of high crude prices (raw material for HPCL), delayed compensations and regulated prices put HPCL in a precarious situation. It is reasonable to expect HPCL’s leverage to go even higher. For the same reasons, the profitability and cash flow for HPCL will be subdued, thus jeopardizing the company’s ambitious capacity expansion plans in refining and exploration segment.

We believe RoCE (Returns on Capital employed) will be a better performance indicator than Returns on Equity (RoE) as far as profitability comparison between the two companies is concerned. As seen in the chart below, BPCL has consistently offered better returns than HPCL on RoCE basis.

And now the valuations

In terms of financials, BPCL emerges as a better player, especially as far as leverage levels are concerned. This is something well in public knowledge and the stock of BPCL seems to be benefitting in terms of current valuations. The stock of BPCL is trading at a Price to Book value multiple of 1.57x versus 0.78x for HPCL. We believe that since both the companies have no control over their earnings, they should be valued on the basis of assets. We believe that BPCL with its prolific gas reserves and Bina refinery outshines HPCL. BPCL’s value accretion on account of gas reserves gets further validation as global companies have bid for interests of other stakeholders in these reserves. Going by such bids, the value of these assets (BPCL’s stake in the gas reseves) is more than a third of BPCL’s current market price. Also, as far as capex plans are concerned, chances of their materialization are higher in case of BPCL that has lower leverage. HPCL, on the other hand, is already heavily geared and bears the risks of delay in capex as oil prices remain high and regulatory scenario unchanged. Hence, we believe that it is is only fair to value BPCL at a premium to its rival HPCL.

By Equitymaster - A leading ‘independent’ research initiative focused on providing well-researched and unbiased opinions on BSE and NSE Stocks.