BPCL: Going full tilt in an unclear political economy
Oil companies' per-se given their very footprint cannot have much wrong going against them. It is therefore a pity to see the straitened circumstances of this oil giant for no fault of its own
A gung-ho management
The chairman of the board Mr R K Singh in his official address to the shareholders is full of bonhomie, and all the more reason since Bharat Petroleum Corporation Limited (BPCL) has completed 60 years of existence in 2012. The company initially incorporated its name plate on Indian soil as Burmah-Shell Refineries Ltd in 1952. It thus celebrated its diamond jubilee too. (It was in 1976 that the Burmah Shell group of companies was taken over by the Central government and renamed as Bharat Refineries Ltd. It was subsequently renamed as Bharat Petroleum Corporation Ltd). Inspite of all the PSU oil marketing companies literally gasping for breath due to having to operate within the cock and bull vagaries of the political economy, the management even found enough space to sign off the diamond jubilee year with a 1:1 bonus issue of shares. This issue in effect hiked the paid up equity capital to Rs 7.2 bn. Given its scale of operations the company is also very sorely undercapitalised.
This also marks the first full year of functioning of the erstwhile Kochi Refineries as a fully fledged division of the company. The chairman states that its foray into the upstream sector has shown great promise with its production arm making some very important finds in Oil and Gas in Mozambique, Brazil and Indonesia. The Board has also recently approved the expansion of the Kochi refinery including a modernisation involving a capital outlay of Rs 143 bn. The refining capacity will increase to 15.5 MMTPA (million metric tonnes per annum) from 9.5 MMTPA as a result. It is also going ahead with the modernisation of the Mumbai refinery at a capital cost of Rs 33 bn. The company is also planning to enter the petrochemicals sector using the raw material produced at the refinery. The company has two refineries - at Mumbai and at Kochi. It also boasts of three lubricant plants - at Mumbai, Budge Budge in West Bengal and at Chennai.
Expansion and modernisation schemes
All expansion and modernisation schemes will however have to be funded through additional debt and internal accruals due to the peculiar shareholding pattern. This holding pattern is unlikely to undergo any change due to the possible political implications if it does so. Presently the Central government holds 54.9% of the outstanding equity which is psychologically a very important barometer. Another 0.9% is held by the Kerala State Government, and a further 9.3% is held by the BPCL Trust for investment in shares. Any additional issue of shares is an unlikely bet, given the financial predicament of the Central government and the resulting inability of the Centre to subscribe to its share of any additional issue. This is a debilitating factor - but the company is still pushing on.
Collectively the group is much much larger if one aggregates the refinery throughput (refining capacity) of its sibling and joint venture. Its subsidiary, Numaligarh Refinery Ltd, in which it has over a 61% stake, has a 3 MMTPA refinery in Assam. There is also the joint venture project, Bharat Oman Refineries Ltd, in which it has 50% stake and has a capacity of 6 MMTPA. The aggregate refining capacity of the standalone company, its sibling and joint venture toted up to 26.72 MMT (million metric tonnes) in 2011-12 against 24.03 MMT previously. (But this figure pales in comparison with the 62 MMTPA capacity of Reliance Industries). It has innumerable other investments in oil, gas, pipeline and storage related ventures in which it has collectively sunk large sums of moneys, both in the form of equity and debt capital. The book value of its investments in these associate companies via the medium of shares, bonds etc amounts to Rs 50 bn. From the information available it has investments in two subsidiaries, 14 joint ventures under various groupings, and three investments in a category titled 'Others'. And what do you know this list includes an Rs 105 m investment in Cochin International Airport. Just about any investment is fair game it appears. Separately, there is an investment of Rs 70 bn in the form of Oil marketing companies Government of India special bonds on which it has made a 'provision' of Rs 10 bn.
A benevolent parent
The gravy train in this respect is unending. It has advanced long term loans and advances to group companies aggregating Rs 23 bn and short term loans and advances aggregating Rs 610 m. Employees are also large beneficiaries. They have availed of long term and short term loans totalling Rs 5.8 bn. It would appear from these gargantuan advances that the company is also doubling as a finance company of some import to the borrowers. It is also some wonder that it was able to pony up the moneys that it has advanced. But there is a hint of where some of it would have emanated from. The borrowings at year end added up to Rs 230 bn against Rs 190 bn previously. Interestingly enough the vast bulk of the borrowings by far represent short term borrowings or borrowings classified as current maturities of long term borrowings.
The way the company operates is that it processes both imported and domestically sourced crude oil. In the last decade the quantum of crude processed has risen sharply from 8,711 TMT (thousand metric tonnes) to 22,912 TMT. The share of domestic crude in the intervening period has dropped from 63% in 2002-03 to 28.6% in 2011-12. (For the matter of record, the total import bill of BPCL in 2011-12 was a humungous Rs 751 bn. This cost however includes capital goods, catalysts and so on). The quantum output of fuel including loss as a percentage of the crude processed is consistent on a rough basis for the decade, ranging from a high of 6.7% in 2005-06 to a low of 5.6% in 2002-03. In 2011-12 it was 6.1%. The market sales on the other hand have risen from 19.9 MMT (million metric tonnes) in 2002-03 to 31.14 MMT in 2011-12. The total sales however include the value addition generated by the flogging of large dollops of 'purchases of stock in trade'. It is of course impossible to make any comparison between the quantum of crude input, to the quantum of production, to the volume sales, as the unit of reference is unique in each respect. The massive modernisation schemes on the anvil may however help to improve the percentage fuel output one would reckon.
Its product lines
The company produces three grades of fuel classifications - light distillates, middle distillates and heavy distillates. The percentage share in the output of the three has been roughly the same over the last ten years. Light distillates accounted for around 33% of total production, followed by middle distillates at around 55% and heavy ends accounted for the balance 12%. In terms of sales value, light distillates in the main are LPG (liquefied petroleum gas) and motor spirits, with naphtha and re-gasified LNG (liquefied natural gas) accounting for the balance. Middle distillates in the main are only high speed diesel, with aviation turbine fuel and superior kerosene bringing in the balance. Heavy Ends in the main are furnace oil and bitumen, with lubricants and low sulphur heavy stock (LSHS) bringing up the rear.
The largest single item of sale is high speed diesel oil - accounting for a little over 52% of all volume sales of 31.14 MMT. This is followed way down below by motor spirit and LPG -with a share of 13% and 12% respectively. Sales of aviation turbine fuel accounted for another 4%. Thus motor spirit, high speed diesel and aviation turbine fuel collectively accounted for 70% of overall volume sales. It is of course very difficult to make any sense of its revenues and expenses as it is not market related. The subsidies on crude oil, superior kerosene oil, LPG and other light and medium distillates amount to Rs 326 bn, and is adjusted either in the revenues or in the expense statements. Besides, the gross sales include the value addition derived on sales of the 'purchase of stock in trade' amounting to Rs 1,122 bn. But the extra value addition that it derived as a result if any is not stated separately. What we do know for certain is that these purchases include goods worth Rs 83 bn sourced from Bharat Oman Refineries, and goods worth Rs 31 bn sourced from Petronet LNG Ltd. Small beer in terms of the overall context of purchase of stock in trade. The balance purchases of stock in trade were apparently sourced from the open market. The purchase of stock in trade includes a curious item called 'Crude Oil' valued at Rs 103 bn. Is one to understand from this that it also buys and sells crude oil? Does it make an extra buck or two here?
How the financials tote up
Suffice to add that the 'gross revenues' for the year amounted to Rs 2,021 bn. The sales figure comprises of petroleum product sales of Rs 1,884 bn and aromatics product sales of Rs 136 bn. Excluded from this figures is the subsidy received from the government amounting to Rs 203 bn. Add this figure and the gross sales amount to Rs 2,224 bn. (In terms of absolute numbers the subsidy amount has scaled up from Rs 100 bn in the preceding year. In percentage terms the subsidy has inched up from 6.1% of gross sales in 2010-11 to 9.1% of gross sales in 2011-12). From the gross sales deduct excise taxes of Rs 105 bn against Rs 117 bn previously. (It would appear from the excise tax collection figures that the sarkar collected substantially less tithes in 2011-12 as compared to the preceding year-- on revenues which grew 36% over that of the preceding year. This statistic does not quite gel though). To this net figure add other operating revenues of Rs 1 bn and one arrives at the net sales figure of Rs 2120 bn. Then on the income side there are other googlies like interest on Oil marketing companies GOI special bonds amounting to Rs 5 bn. This is again related to the subsidy regime. From the revenue expenditure side of the equation the subsidy amount of Rs 130 bn has been 'adjusted' against purchase of raw materials or on the purchase of stock in trade. These are mega sums of money.
How the subsidy bill is decided on is not immediately known but the net effect of the subsidy regime is that the net revenue from operations grew 40%, and the cost of materials consumed at Rs 850 bn also grew by a similar percentage figure. (Assuming that the entire quantum of stock in trade that it purchased was sold in the same accounting period, then the purchase on this count went up a tad more at 44%). For the matter of record the cost of material inputs including the purchase of stock in trade rose 42%. (The drop in the pre-tax profit to Rs 18.8 bn from Rs 23.9 bn previously could be as a result of the purchase of stock in trade item). All other revenue expenses are pidgin in comparison including the next biggest expense item labelled 'other expenses' which grew 33% to Rs 87 bn. This item of expenditure includes the set off of fuel consumption amounting to Rs 48 bn against its own production of fuel leading to a net charge of a mere Rs 7 bn on the one hand, and on the other, it is the net effect of being on the wrong side of the forex draw. Oil companies splurge humungous sums on the import / export of crude oil and its derivatives. In 2011-12 the total amount of forex that it oiled in this respect amounted to Rs 944 bn against Rs 640 bn previously. Such humungous forex needs could also lead to very negative fallouts. In the latest accounting year for example, the company had to write off Rs 14.2 bn in the 'Other expenses' schedule as it took the wrong call on the forex front as against a mere Rs 310 m that it did previously. Separately it has accounted for another forex loss of Rs 7.4 bn under the head of 'finance costs' against Rs 2 bn previously. Curiously enough it was on the wrong side of the draw on all counts in both the years. Besides, the total loss booked in the latest year is more than the annual turnover of a sizeable number of our listed companies.
How it finances itself
Creditably enough the cost of borrowing was kept under tight control. The interest paid out of Rs 9.7 bn and debited to P&L account amounted to a piffling 4.2% on a rough basis. This is an improbably low percentage outflow. (It may also be noted that the interest expenses grew only marginally over that of the preceding year). This low percentage payout is inspite of the fact that the bulk of the loans amounting to Rs 191 bn were sourced from banks under the heading of 'Short term loans' which would carry a higher coupon rate. To compound matters foreign currency borrowings amounted to 98% of such short term borrowings. This brings with it another bogey. Any depreciation of the rupee on the contracted rates will add to its repayment liability. This is not a happy augury especially when the company is operating in such shackled conditions. But this is the reality of the matter.
Its short term working capital management is as good as it gets with current liabilities at year end posting a higher figure than the current assets. It helps that the company is also a PSU biggie which can dictate terms to its business associates. But it falls short in many other aspects. Take for example its investments portfolio which at year end toted up to Rs 109 bn. Now add to this the 'loans and advances' to group companies adding up to another Rs 22.3 bn. The other income schedule lists a number of receipts. The receipts relating to the above figures include interest on GoI special bonds of Rs 5.2 bn, and dividend income of Rs 1.4 bn. That adds up to a total of Rs 6.6 bn. Now juxtapose this total figure with the capital sums invested in these companies and you will get the big picture. Of course these receipts do not take into account the other inter-se benefits or otherwise that the parent derives from its dealings with its associates which in any case cannot be computed. And some of its investments in associates appear to be forced on it or something. It has for example equity investments in 16 joint ventures where the percentage ownership ranges from a high of 50% to a low of 11%. Besides, how an 11% holding in another venture qualifies for a joint venture classification beats me totally. It is not known in how many of these JVs it possesses management control, or any say for that matter.
The company also appears to play a double game in its dealings with its siblings. As stated earlier it buys and sells goods from two siblings - Bharat Oman Refineries and Petronet LNG. As the year end receivables and payables figures show, the siblings get an infinitely longer credit line to pay their dues to the parent as compared to the time taken by the parent to pay for what it purchases from them. Obviously there is an inherent loss to the parent as a result of this oversight.
Besides, the financial performance of its siblings and their underlings does not add up to more than a zero for the present. In addition to the two India incorporated siblings -one in which the parent has a 61.6% stake and one in which it has a 100% stake - there are five others who are takeoffs of the two siblings. Bharat PetroResources, one of the two siblings has spun off two wholly owned siblings of its own-one of which is incorporated in the Netherlands. The Netherlands underling which is a holding company of sorts has spun off a further three wholly owned underlings--incorporated respectively in Indonesia, Mozambique and the Netherlands. But the investments in its siblings is not showing up in the abridged balance sheets of either Bharat PetroResources and BPRL International B.V. The four offshore companies are dollar denominated. The collective capital base of these seven underlings is Rs 55.4 bn and they boast a total asset base of Rs 113 bn.
Of this lot only one has left the starting blocks as yet. Numaligarh Refinery posted a turnover of Rs 141 bn and posted a pre-tax profit of Rs 2.9 bn and a post tax of Rs 1.8 bn. It also proposed a hefty dividend payment of Rs 730 m of which 61.6% accrues to BPCL. The status of its other numerous joint ventures is not known. But from the dividend receipts in BPCL's books their present status does not seem to amount to much.
In the context of these financials the exuberance exuded by the chairman in his address to the shareholders appears to be a little overblown.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.
Equitymaster requests your view! Post a comment on "BPCL: Going full tilt in an unclear political economy". Click here!
Thank you for posting your view on Equitymaster!
In the meantime, you may want to share this article with your friends!
Asad Dossani discusses how he made 70% profit in just 3 months. It involved learning from past mistakes, and working hard to develop a profitable algorithmic trading system. You can learn more by signing up for the Profit Hunter Master Series