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KRL: Robust realizations… - Views on News from Equitymaster
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  • Jan 24, 2005

    KRL: Robust realizations…

    Performance summary
    Kochi Refineries, a refining subsidiary of the oil refining and marketing major, BPCL, has posted robust 3QFY05 results with a topline growth of over 46% YoY while the bottomline has grown by an impressive 163% YoY on the back of strong other income. The faster rise in profits as compared to the topline growth could be attributed to the increase in gross refining margins (GRMs).

    What is the company’s business?
    Kochi Refineries is the refining subsidiary of BPCL having capacity of 7.5 MMTPA (million tonnes per annum). Given the synergies between the two companies, KRL is likely to be merged with BPCL in the next fiscal. The swap ratio has been decided for the two companies, with the shareholders of Kochi Refineries getting 4 shares of BPCL for every 9 shares held. KRL caters to BPCL’s vast retail network in the southern parts of the country. With plans to enter into the fuel retailing business by the subsidiary and BPCL’s need to add to its refining capacity, the merger is likely to strengthen the balance sheet and bring in synergies as KRL can benefit from its parent’s expertise in fuel retailing business.

    (Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
    Net sales 24,542 35,921 46.4% 70,110 96,704 37.9%
    Expenditure 22,546 32,076 42.3% 64,217 86,878 35.3%
    Operating profit (EBDITA) 1,996 3,845 92.6% 5,893 9,826 66.7%
    EBDITA margin (%) 8.1% 10.7%   8.4% 10.2%  
    Other income 19 108 468.4% 398 243 -38.9%
    Interest 94 85 -9.6% 308 254 -17.5%
    Depreciation 308 320 3.9% 895 951 6.3%
    Profit before tax 1,613 3,548 120.0% 5,088 8,864 74.2%
    Tax 516 661 28.1% 1,641 2,691 64.0%
    Profit after tax/(loss) 1,097 2,887 163.2% 3,447 6,173 79.1%
    Net profit margin (%) 4.5% 8.0%   4.9% 6.4%  
    No. of shares (m) 138.5 138.5   138.5 138.5  
    Diluted earnings per share (Rs)* 31.7 83.4   33.2 59.4  
    Price to earnings ratio (x)   2.1     3.0  
    (* annualised)            

    What has driven performance in 9mFY05?
    Firm product prices:  During 3QFY05, Kochi Refineries witnessed strong topline growth of over 46% backed by firm product prices in the international markets. Geo-political tensions in Saudi Arabia and lower oil inventories in leading consumer countries led to a sharp rise in product prices with petrol and diesel touching peaks of US$ 55 per barrel and US$ 54 per barrel respectively. Since Indian refineries are able to realize import parity prices (i.e. prices at international prices including domestic duties) at the refinery gate, Kochi Refineries benefited from the same. Having said that, the domestic markets also witnessed strong volume growth with diesel (accounting for 40% of the petroleum products basket) registering nearly 6% growth while LPG continued to grow in double digits.

    Expenditure Table
    (%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
    Consumption of raw materials 88.0% 86.4% 87.6% 85.6%
    Staff cost 1.1% 0.6% 1.0% 0.7%
    Other expenditure 2.8% 2.4% 3.0% 3.5%

    GRMs provide the boost:  During the quarter under review, KRL has been successful in improving its operating margins by 260 basis points. This comes on the back of strong refining margins, which have remained strong in the current fiscal. To put things in perspective, KRL witnessed robust refining margins of US$ 5.8 per barrel during 9mFY05 as compared to US$ 2.9 per barrel during the corresponding period last fiscal. Further, as per ministry reports, Indian PSU refineries operated at over rated capacity levels, resulting in economies of scale, thereby improving margins.

    Trickle down to the bottomline:  Robust realizations and control over costs have helped KRL in improving its bottomline with a strong 163% growth. A sharp increase in other income of over 468% has also contributed to the bottomline. Further, the company has been able to reduce its interest outgo by nearly 10% during the quarter.

    What to expect?
    At Rs 177, the stock is trading at a price to earnings multiple of 3 times annualized 9mFY05 earnings. Although the refining margins are likely to remain strong in the near term, we believe this has been factored into the stock price. The recent announcement on the merger is likely to be a positive for Kochi refineries from a long-term growth perspective, given that BPCL’s strong marketing expertise shall smoothen KRL’s entry into the business, while the high GRMs are likely to add to BPCL’s bottomline.



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