Is HPCL a Contrarian /Graham buy now?
Printed From: The Equity Desk
Category: Investment Ideas - Creating winning portfolios!
Forum Name: Stock Synopsis
Forum Discription: A bried discussion of companies on very specific matters. Normally this is the prelude for further research as always members would be discussing quality companies with good management only
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=1675
Printed Date: 21/Apr/2025 at 11:21pm
Topic: Is HPCL a Contrarian /Graham buy now?
Posted By: valueman
Subject: Is HPCL a Contrarian /Graham buy now?
Date Posted: 18/Mar/2008 at 10:42am
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Ramesh Damani few months back hinted at HPCL as a good contrarian buy
in many of his chats .HPCL /BPCL are great companies but are being
killed due to government policies but there is a thought that with
recession looming over in America it will lead to Oil prices coming
down . Any takers for HPCL as a Contrarian Buy or Graham Buy at this stage ? Vivek ,you are the best Graham follower here .Kindly do a Copy Book Graham Analysis on HPCL . ------------- To achieve satisfactory investment results is easier than most people realize ; to achieve superior results is harder than it looks . Benjamin Graham. |
Replies:
Posted By: basant
Date Posted: 18/Mar/2008 at 11:06am
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It has been a contra buy since the start of this bull amrket. Every quarter we had new pushers for this stock first it was Shankar Sharma, then Ramdeo Agarwal, then Ramesh Damani.
The best way to analyse this stock is to figure out why and when it would not be a value pick.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: valueman
Date Posted: 18/Mar/2008 at 11:18am
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I found the following analysis on HPCL from another blog and sharing the same .Others also pass their comments .I am yet to make an investment in HPCL and will do so when the market corrects still further down . Primarily my interest in HPCL is due to the dividend yield and no better opportunity but now to get a better yield .If external situation improves in its value unlocking them it is an added bonus . http://valueinvestorindia.blogspot.com/2007/07/graham-idea-selling-below-replacement.html - http://valueinvestorindia.blogspot.com/2007/07/graham-idea-selling-below-replacement.html July 19, 2007 Graham idea Selling below replacement cost HPCL Statutory warning A long post with links to other analysis. I have analysed the oil & gas industry and specifically refineries earlier (see here). In addition an analyis of the industry is also posted on my spreadsheet. The oil majors have not been a part of the current bull run and the main reason is the convoluted pricing and subsidy structure. As a result the sector is not doing too well and may have some opportunities. I have developed an investment thesis for HPCL which is given below About HPCL is one of the Oil majors with almost 13MMT refining capacity. It is engaged in the business of refining crude and marketing end products. In addition it is also integrating backwards into E&P, lube marketing via its Lube SBU and into the Gas distribution business. The problem The Oil & gas business in india has one of the worst economics possible. The pricing though supposed to be decontrolled, is still controlled by the government. As a result in a rising crude price scenario, where other Oil majors across the world are minting money, companies like HPCL, BPCL, IOC etc have been bleeding. The typical Gross refining margins for companies like RPL has been around 10 usd per barrel. A company like HPCL should easily be able to make 6-7 usd / barrel. However in the last 1-2 years the Gross margins have been 3-4 and net margins have been around 1 usd/ barrel. The above is due to subsidized sales of products such as Petrol, diesel and kerosene etc Due to the above situation, O&G companies have been beaten down and now sell below replacement value of their asset. The opportunity and investment thesis HPCL now sells at around 9000 crores. The EV is around 10000-11000 crores at best. The replacement cost for the assets of HPCL can be calculated as follows 1.Refinery 13MMT ( greefields projects cost around 1200-1800 Crs/ MMT) 19000 (approximate) 2.Petrol pumps / retail outlets 7313 (average cost atleast 1 cr/ outlet 7000 Crs (approximate) 3.LPG distributors 2202, customers 2.28 crores - ?? 4.Other gas assets such as pipeline 2000 Crs + (1700 crs invested in last 5 years), avantika gas, Bhagyanagar gas etc. 5.Other assets some value 6. JVs MRP (17%) 1200 Crs and other JVs The above assets can conservatively be valued at 25000 30000 Crs. So the company sells at 25-30 % of the replacement value of its assets. The above discount is definitely not an abberation. It is mainly due to policies of the government. However I think the gap is higher than it should be and the main reason is that the market is assuming that the current state of affairs would continue as is. I dont believe the government is going to change its ways, however I think the bottom line of company should improve due to the following reasons 1. The company is currently engaged in diversifying its revenue streams via various initiatives and reduce the impact of the pig headed policies of the government. These initiatives are lube marketing, Gas distribution and retail initiatives and oil trading and risk management. The market is currently not valuing any of these real options. 2. The GRM and net refining margins are at their lowest. Going forward the worst case sceanrio is that they would remain at the same level. If that is the case, the bottom line should still improve as the various company intiatives take effect (see page 53 of Annual report) 3. The 9 MMT refinery and expansion of Vizag refinery to 15 MMT and export of the petro-products and E&P activities should help the company improve its margins going forward. Conclusion Although there exists a substantial discount to the assets value and possible cash flows, the gap is not likely to close any time soon. However even if the market reduces the gap to 50-60% of asset value, the returns should be reasonable. In addition the company is selling at a 5 year low in terms of its PE and P/B ratio. The key triggers to watch would be crude prices and the level to which the government compensates for the underrecoveries. ------------- To achieve satisfactory investment results is easier than most people realize ; to achieve superior results is harder than it looks . Benjamin Graham. |
Posted By: valueman
Date Posted: 19/Mar/2008 at 4:48pm
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Saw this piece put in another thread and copying the same here .This is what I feel will act as a trigger for Oil Companies like HPCL /BPCL etc . Subject: US recession - Oil prices - and India http://www.theequitydesk.com/forum/forum_posts.asp?TID=733&PN=10 - http://www.theequitydesk.com/forum/forum_posts.asp?TID=733&PN=10 MF Global's Indian economist, Ms. Anjali Verma has pointed out an interesting datapoint on the imapct of US recession on oil prices in her recent report on "US Economic Indicators". Every US recession was caused by different factors, but each one resulted in crude price correction, says Anjali. The graph below shows the daily movement of crude prices. The Brent prices are available from 1987 onwards, and hence she has used NYMEX crude oil future contract prices. The highlighted blocks represent the periods of crude correction. If now US indeed goes into recession - which many believe - it is not unreasonable to assume that there could be a meaningful fall in crude prices (the shift from equities to commodities and US$ weakness may only provide temporary support, but when the actual demand slows down thanks to downturn in the global economy the fall in prices may be the sure outcome). India imports 800 Mn. Barrels of oil every year. Every $ 10/bbl increase or decrease in oil prices results in $ 8bln outflow/inflow of foreign exchange, which is 0.8% of GDP. India is believed to be the country with HIGHEST ENEREGY INTENSITY in the world, even ahead of even China. If oil prices drop from here meaningfully, it will result in valuable savings of foreign exchange for the country. Money saved is money earned. Imagine, if oil prices internatinally were to drop by $ 20 from here (annual average price), it could result in savings of $ 16 bln or 1.6% of India's GDP. If oil prices drop by $ 30, the savings is $ 24 bln or 2.4% of India's GDP. If India has managed to grow at 8% plus despite high oil prices, it shows the resilience of the economy (of course, significantly supported by Govt's subsidy doleouts which are at the cost of oilbonds issued by the Govt). India's high energy intensity may be blessing in disguise if the oil prices fall from here thanks to US recession, because money saved is money earned. This buttresses the argument that India is one of the best hedges in the world against US recession. Food For Thought. ------------- To achieve satisfactory investment results is easier than most people realize ; to achieve superior results is harder than it looks . Benjamin Graham. |
Posted By: rohitc99
Date Posted: 19/Mar/2008 at 12:46pm
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[QUOTE=valueman]I found the following analysis on HPCL from another blog and sharing the same .Others also pass their comments .I am yet to make an investment in HPCL and will do so when the market corrects still further down . Primarily my interest in HPCL is due to the dividend yield and no better opportunity but now to get a better yield .If external situation improves in its value unlocking them it is an added bonus . http://valueinvestorindia.blogspot.com/2007/07/graham-idea-selling-below-replacement.html - http://valueinvestorindia.blogspot.com/2007/07/graham-idea-selling-below-replacement.html Hi valueman i had posted the above analysis quite some time back. On the fundamental level oil prices have gone up further since then and the goverment due to election year may not raise prices. so it is unlikely that the any of the fundamental triggers will kick in this year or anytime soon. there may be a long wait on this stock.
the upside is that stock is selling at such low valuations, that the downside is low.
disclosure - i hold small quantities of this stock - more from an academic point of view
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Posted By: Vivek Sukhani
Date Posted: 19/Mar/2008 at 11:46am
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Hi value and Rohit,
A small piece of note, nothing connected with HPCL in particular. During these times, I believe one should ask himself a few questions before he takes a plunge:
1.Am I buying because its not likely to go down further....
2. What will I do in case it becomes 50 p.c. cheaper( price-wise) from here. Will I be cursing my luck or be happy to load it more.
Its a mistake to buy on the presumption of a stock is not likely to fall more from present levels. Markets have made a monkey of such value mongers.
However, if the answer to the question is that we will be happy to load it more, then one shall not mind buying at all. Its a buy at every level, and a bigger buy at lesser levels.
Just a random thought....nothing connected with HPCL directly.
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Posted By: rohitc99
Date Posted: 20/Mar/2008 at 1:01am
hi vivek
i guess it comes to ones personal approach to investing. i cannot speak for others, but if i think the company is undervalued and below my buy target i start buying.
if it drops , subject to my position limit in the portfolio , i end up buying further. If the fundamentals have not changed, i do not worry with price fluctuations. Actually as i am usually looking at out of favor companies (and the non sexy sectors), a price drop happens most of the times.
I have seen in the past that if i have done my homework well and understand the company well, the market price catches up with value. However if i am wrong, then i will lose money ...sooner or later.
HPCL frankly is not a typical value play ...it could very well be a value trap where the value is just an illusion. The key reason is that the biggest shareholder (goverment) is bent on messing up the company.
My analysis and post on the blog is more of an academic exercise and i want to see how it plays out. however i personally would not include HPCL as an big component of my portfolio ..with all the meddling by the government.
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Posted By: Vivek Sukhani
Date Posted: 20/Mar/2008 at 1:33am
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didnt mean anything offending Rohit......
Will like to know more about the companies you like.....
Thanks mate,
Vivek
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Posted By: rohitc99
Date Posted: 20/Mar/2008 at 5:30am
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no offense taken following are the companies i like at their current prices
asian paints - long term holding
merck
novartis
grindwell norton
gujaratgas
allahabad bank - exited thanks to the loan writeoff
hpcl
ultramarine
concor
GSK consumer - saw it in your list, analysed it and liked it
cheviot
VST
Patni, NIIT tech - currently analysing
ashok leyland
I have analysed most of them and posted on my blog. feel free to share your opinion on these companies
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.. always good to hear a different view. would not learn from others if everyone agreed with mePosted By: Vivek Sukhani
Date Posted: 20/Mar/2008 at 11:13am
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Hi Rohit, Good list....most of them I will like to be a shareholder in.
Coming to HPCL's case, I think its better to be with a pure refiner which gets a GRM rather than into a refining-cum-marketing company like an Indian Oil or a BP or a HP.
Was talking to dad a few days back regarding these OMCs, and i said awrong thing about Indian. he shot back immediately that isnt it a shame that India's largest company in listed domain is being treated like this. He says that those who talk wrong about Indian Oil should work out the scenario in case the company goes bust....
I understand thats not a good way of looking at things but his view has made me to rethink on my criticisms about Indian at least. These are not 300 crore turnover companies growing at 40 p.c. for first 5 years then at 30 p.c. for next 5 years and then maturing. These are perennial companies which will grow in topline at the rate at which the country grows.
Now as shareholders, returns may languish. But I see no way this company will not survive. The country needs this company.
this company may not be part of group here you can invest with worry-free. But those which are worry-free bets, are to be bought during bust period, when we get them at reasonable valuations.
I think, I can extend my opinion regarding Indian Oil to HP, BP as well....
Regards,
Vivek
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Posted By: Vivek Sukhani
Date Posted: 25/Mar/2008 at 6:05pm
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http://www.thehindubusinessline.com/businessline/blnus/14251506.htm - http://www.thehindubusinessline.com/businessline/blnus/14251506.htm
I am unable to make out as to whether I shall be happy with this news. The way this competitor has been made to surrender, is really mind-blowing.
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Posted By: smartcat
Date Posted: 25/Mar/2008 at 6:12pm
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Yes - force the competitor to close down by losing Rs. XXXX crores every year. But even if Indian Oil or HPCL or BPCL were to be a monopoly, they wouldn't have any pricing power. Then what's the point in being a monopoly or being responsible for closing down a competitor?
RIL will sell their wares elsewhere and rake in the money.
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Posted By: Vivek Sukhani
Date Posted: 25/Mar/2008 at 7:04pm
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Can it be a good development for RIl. Now, they have to change the distillate structure in favour of complex distillates which may be carrying better margins.....no idea on such things, but I think its quite possible, right?
HP, BP, Indian may not enjoy pricing power but their importance is such that in case things go out of hand, mai-baap will always be ready to support them. Thats their biggest strength as well. I was so amzed to see their dividends when actually they are making losses on the main upstream products.
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Posted By: smartcat
Date Posted: 25/Mar/2008 at 11:13pm
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All that Ambani has to do is press the button next to "Vaseline Petroleum Jelly" instead of the one next to "Petrol" to change the product mix from the refinery.
I'm looking forward to reading brokerage reports on RIL now. I'm quite sure all that real estate (derelict Reliance petroleum bunks) will have some SOTP value.
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Posted By: Vivek Sukhani
Date Posted: 25/Mar/2008 at 11:28pm
I have heard that Reliance prefers DODO( Dealer owned dealer Operate) model to COCO model( Company owned Company operate).So, god only knows Sum of the parts valuation.
Now you may press vaseline jelly instead of petrol, but the issue is the quantity you are refining and the output you require. If you produce too much of something which you or most importantly, the market doesnt require, you cant go ahead with such a distillation plan.
the only alternative is idling your capacity and maximising production of high margin distillates.
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Posted By: gopal
Date Posted: 25/Mar/2008 at 11:31pm
Vivek bhai,
this subsidy may end after the next general elections due to following points ::--
If we just look at above and also Manmohans new focus that subsidies should only be for bpl parties .... so subsidies will end in big way as soon as the next government comes in ..... simply because the NEXT FM EVEN IF IT CHIDAMBARAM WILL BE LEFT WITH NO OPTION .... ------------- Women are like the stock market Coz they're irrational n can bankrupt u if u're not careful |
Posted By: Vivek Sukhani
Date Posted: 25/Mar/2008 at 11:34pm
| so????????? |
Posted By: Vivek Sukhani
Date Posted: 25/Mar/2008 at 11:45pm
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bhai log,
aap log mereko hamesha ONGC se kyon darrate rehte hain. Yadi mai baap oil bond nahi denge to kharcha to ONGC, GAIL aur Oil India ko hi bharna padega naa.
Aage aage dekhein kya hota hai.
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Posted By: gopal
Date Posted: 25/Mar/2008 at 11:50pm
bhai, main aapko kiyo darauga ....... you put a point that on the basis of budgetry support ONGC is able to take on competitors ...... i simply put forward my point that soon budgetry support might no more be possible ..
------------- Women are like the stock market Coz they're irrational n can bankrupt u if u're not careful |
Posted By: Vivek Sukhani
Date Posted: 25/Mar/2008 at 12:00pm
Bhai mere, ONGC ko koi budgetary support nahi chahiye...ONGC indirectly supports the budget by providing discount which would otherwise have to be compensated by oil bonds.
Now if you were talking about downstream marketing companies like HP, BP and Indian, I think governemnet cannot let either of them die. If subsidies will not be there, then taxes can be imposed on poor people who pay taxes in the form of cess like we have education cess at the moment. excise duty may be cut, import duties may be cut, many other ways can be found out.....
In any case, it doesnt pay much to speculate on such speculative pieces of imagination/assumption/thinking.
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Posted By: valueman
Date Posted: 16/Oct/2008 at 9:19pm
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With Oil Prices coming down to around 80$ from $150 and with the possibility of it still sliding down will this act as a positive trigger for HPCL /BPCL?
------------- To achieve satisfactory investment results is easier than most people realize ; to achieve superior results is harder than it looks . Benjamin Graham. |
Posted By: tigershark
Date Posted: 16/Oct/2008 at 10:13pm
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yes but these cos r run by govt and we all know how smart they r.look what they did to ongc ------------- understanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things |
Posted By: Market Maniac
Date Posted: 28/May/2010 at 2:49am
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Value of HPCL's quoted investments is equal to its current M. Cap
Declared a Divident of 12/- this year so the yield is 3.5% at CMP of 335/-
Some day sanity will dawn on the government
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