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BPCL : Margins spur growth - Views on News from Equitymaster
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  • Jan 31, 2004

    BPCL : Margins spur growth

    Oil marketing major, Bharat Petroleum Corporation Ltd, has announced a strong December quarter performance. While the topline grew by 9% YoY, the bottomline has jumped by 108%. The company’s operating margins have shown an improvement of 240 basis points. The nine months picture also reflects similar performance at the topline and at the operating margin level.

    (Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
    Net sales 126,475 137,627 8.8% 349,584 381,253 9.1%
    Other income 939 714 - 2,633 3,313 -
    Expenditure 121,840 129,267 6.1% 334,294 359,921 7.7%
    Operating profit (EBDITA) 4,635 8,360 80.4% 15,290 21,332 39.5%
    Operating profit margin (%) 3.7% 6.1%   4.4% 5.6%  
    Interest 871 249 -71.4% 2,099 813 -61.3%
    Depreciation 1,089 1,315 20.8% 3,373 4,071 20.7%
    Profit before tax 3,614 7,510 107.8% 12,451 19,761 58.7%
    Extraordinary items - - - - - -
    Tax 1,284 2,667 107.7% 4,425 6,954 57.2%
    Profit after tax/(loss) 2,330 4,843 107.9% 8,026 12,807 59.6%
    Net profit margin (%) 1.8% 3.5%   2.3% 3.4%  
    No. of shares (m) 300.0 300.0   300.0 300.0  
    Diluted earnings per share (Rs)* 31.1 64.6   35.7 56.9  
    P/E ratio (x)         8.2  
    (* annualised)            

    The increase in the topline is mainly driven by high growth in LPG sales (16%), naphtha (9%) and ATF (11%). Although, the expenditure has increased, it is not in proportion to the increase in the topline. This is mainly due to the fact that the company has benefited from the subsidy sharing agreement whereby, ONGC has supplied crude (which forms a major part of raw material cost) at cheaper rates. Further, the company has been able to reduce its other expenditure and duties. Although the cost of raw materials has increased, it would have been much higher, but for the guidelines issued by the government for sharing of subsidy. As a result, the company has shown an improvement to the tune of 80% in the operating profits during the 3QFY04.

    Cost Breakup
    (% sales) 3QFY03 3QFY04 9mFY03 9mFY04
    Raw materials cost 24.6% 18.5% 18.4% 18.9%
    Staff cost 1.3% 1.2% 1.4% 1.3%
    Purchase of products for resale 57.1% 58.9% 59.1% 59.8%
    Duties, taxes and other charges 9.4% 10.9% 12.1% 10.2%
    Other expenditure 4.0% 4.4% 4.6% 4.3%

    The company’s bottomline grew by a strong 108%, which is largely due to the fact that the company has been able to reduce its interest expenses by 71% during the quarter as compared to the corresponding period last year. The company’s gross refinery margins have improved from US$ 2.9 per barrel to $3.4 per barrel during the 9mFY04. This margin excludes the impact of past dues and discount provided by ONGC.

    BPCL is now planning investments in the exploration segment over the next 3 to 5 years. The latest developments in the sector such as lifting the curbs on the FDI limit by allowing foreign investors to bring in 100% FDI through the automatic route are encouraging. This will boost investments in refineries, marketing, small and medium sized exploration blocks and petroleum product pipeline infrastructure. The marketing rights of the transport fuel to foreign and private players would end the monopoly of the PSUs. If the Petroleum Ministry’s estimates are to be believed, around 500 private retail outlets are to be in place by April 2004. This shall lead to greater competition in few areas and aggressive branding, thereby bringing about the benefits to the final consumer. But in terms of preparedness, the PSU marketing majors seem to be heading in the right direction.

    At Rs 465, the stock is trading at a P/E ratio of 8.2x annualised 9mFY04 earnings. Historically, the company has grown in line with the GDP growth. Given the current low interest rate scenario on consumer loans, the automobile sector is likely to see healthy demand growth. This shall further benefit BPCL. Having said that, we expect petrol and diesel demand to grow in the mid single digit levels. Good monsoons and conversion of vehicles into CNG or LPG as per Bharat Stage II augur well for the company in the long run. Further, stabilization of crude prices in the next few years shall ease the pressure further, thereby enabling the company to manage its costs in a more effective and an efficient manner. Any adverse movement of crude prices, change in government regulation in light of the budget and large capital expenditure plans are key risks in the process.



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