January 6, 2008

HPCL – a quick review

I had written about HPCL earlier (see here). To recap, my main thesis was as follows.

HPCL now sells at around 9000 crores. The EV is around 10000-11000 crores at best. The replacement value of the assets is around 25000-30000 crs. The company is selling at 25-30% of replacement value, which can reduce 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.

So what is the situation now ? Well the company is selling at around 400 Rs/ share and the gap has now reduced to around 40% of replacement value. It is easy to declare that the original thesis has been validated. However although I think that the above reasons are still valid, they are not responsible for the reduction in the gap. I expected these reasons to play out over 1-2 years. However in the current bull run, each and every listed stock is rising almost every other day. HPCL is no different. That said, I am not complaining if I have been lucky.

These are interesting times in the market. The market is now at a PE of almost 27. Almost 1000+ stocks are now at a 52 week high and any stock which one could have picked in the last 6 months has risen. I cannot speak for others, but for me it is time to be cautious. Frankly I am having diffculty finding good ideas. It has almost become like searching for a needle in a haystack. However for me doing nothing is better than doing something stupid.

Disclosure: I have a position in the stock. As always please see the disclaimer too.

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