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BPCL: Haunted by under recoveries - Views on News from Equitymaster

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BPCL: Haunted by under recoveries
Jan 31, 2008

Performance summary
  • Topline increases by 20% YoY during 3QFY08, helped by oil bonds.

  • EBITDA margins fall by 1.3% due to under recoveries of high input prices.

  • Other income rises by 28% YoY during the quarter.

  • Bottomline registers a decline of 4% YoY owing to decline in operating profits.

  • Topline and bottomline grow 8% YoY and 58% YoY respectively in 9mFY08.

Standalone Financial snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 242,056 289,284 19.5% 723,383 779,682 7.8%
Expenditure 235,164 284,913 21.2% 704,809 757,602 7.5%
Operating profit (EBDITA) 6,892 4,371 -37% 18,574 22,080 18.9%
EBDITA margin (%) 2.8% 1.5% 2.6% 2.8%
Other income 1,487 1,904 28.0% 4,720 9,897 109.7%
Interest 1,298 1,620 24.8% 3,036 4,088 34.7%
Depreciation 2,484 3,065 23.4% 5,951 7,663 28.8%
Profit before tax 4,597 1,590 -65.4% 14,307 20,226 41.4%
Extraordinary income/(expense) - 1,279 - -
Tax 1,562 (44) 5,460 6,283 15.1%
Profit after tax/(loss) 3,035 2,913 -4.0% 8,847 13,943 57.6%
Net profit margin (%) 1.3% 1.0% 1.2% 1.8%
No. of shares (m) 361.5
Diluted earnings per share (Rs)* 60.64
Price to earnings ratio (x)* 5.9
(* on trailing twelve months earnings)

What has driven performance in 9mFY08?
  • BPCLs gross refining margin during 9mFY08 was US$ 4.41 per barrel (previous year US$ 3.12 per barrel) for Mumbai refinery and US$ 6.58 per barrel (previous year US$ 2.20 per barrel) for Kochi refinery.

  • Sales include Government of India special bonds to the tune of Rs 21 bn and Rs 46 bn for 3QFY08 and 9mFY08 respectively (previous year: Rs 11 bn and Rs 43 bn respectively). It may be noted that the bonds accounted for 3QFY08 are yet to be received.

  • The results continue to be affected due to high crude oil prices, which could not be fully passed on to the consumers resulting in low product prices.

  • The under recoveries were partially compensated by the upstream oil companies, ONGC and GAIL, through discount on purchase (subsidies) of crude oil, LPG and SKO. The subsidies for 3QFY08 were to the tune of Rs 16 bn and Rs 36 bn for 9mFY08 (previous year: Rs 6 bn and Rs 33 bn respectively).

  • During 9mFY08, subsidy claim towards sale of SKO (PDS), and LPG (Domestic) amounted to Rs 4.1 bn (last year Rs 3.9 bn).

    Cost break-up
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Raw materials 222,791 274,900 23.4% 666,268 721,020 8.2%
    % sales 92.0% 95.0% 92.1% 92.5%
    Staff cost 2,651 2,798 5.5% 6,888 8,423 22.3%
    % sales 1.1% 1.0% 1.0% 1.1%
    Other expenditure 9,722 7,215 -25.8% 31,653 28,159 -11.0%
    % sales 4.0% 2.5% 4.4% 3.6%
    Total cost 235,164 284,913 21.2% 704,809 757,602 7.5%
    % sales 97.2% 98.5% 97.4% 97.2%

  • Other Income for 9mFY08 includes Rs 3 bn towards gain on foreign exchange variation. For 9mFY08, there was foreign exchange variation loss of Rs 779 m that was accounted as other expenditure.

  • Exceptional item for 3QFY08 represents profit from sale of 49% stake in Bharat Shell Ltd, a joint venture with Shell Overseas Investment BV (Shell) of Holland.

What to expect?
At the current prices of Rs 360, the stock trades at a multiple of 6 times its trailing twelve months earnings. We advise caution at this juncture as high crude prices and regulatory concerns will continue to impact the performance of the company.

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