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BPCL: Volumes rise, but...

Feb 1, 2005

Performance summary
Bharat Petroleum Corporation, the country's second largest oil marketing company in the country in terms of market share announced mixed results for 3QFY05. Although the topline has grown by a strong 37% YoY during the period, the bottomline has dipped sharply by nearly 70% YoY on account of pricing freeze on one hand and higher crude oil prices on the other.

What is the company's business?
BPCL is one of the leading integrated oil refining and marketing companies in the country. The company operates a refinery at Mumbai having capacity of 8.7 MMTPA, which is likely to be increased to 12 MMTPA by the end of FY05. On the marketing side, BPCL has a vast retail network of over 5,000 retail outlets across the country. The company boasts of a market share of over 30% in case of petrol, and also controls nearly 25% of the diesel pie. Further, BPCL has nearly 25% market share in the fast growing LPG business. The company is likely to merge its subsidiary, Kochi Refineries with itself in FY06.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 121,105 165,670 36.8% 392,640 476,590 21.4%
Expenditure 112,655 162,366 44.1% 360,821 448,846 24.4%
Operating profit (EBDITA) 8,450 3,304 -60.9% 31,819 27,744 -12.8%
EBDITA margin (%) 7.0% 2.0% 8.1% 5.8%
Other income 624 602 -3.5% 2,374 1,988 -16.3%
Interest 249 379 52.2% 2,077 1,831 -11.8%
Depreciation 1,315 1,387 5.5% 6,075 6,662 9.7%
Profit before tax 7,510 2,140 -71.5% 26,041 21,239 -18.4%
Tax 2,667 683 -74.4% 9,459 6,941 -26.6%
Profit after tax/(loss) 4,843 1,457 -69.9% 16,582 14,298 -13.8%
Net profit margin (%) 4.0% 0.9% 4.2% 3.0%
No. of shares (m) 300.0 300.0 300.0 300.0
Diluted earnings per share (Rs)* 64.6 19.4 73.7 63.5
Price to earnings ratio (x) 21.8 6.7
(* annualised)

What has driven performance in 9mFY05?
Volumes boost revenues: During 9mFY05, BPCL witnessed a topline growth of over 21% YoY on the back of strong volume growth witnessed by the industry. To put things in perspective, diesel sales have grown by nearly 6% while petrol sales grew marginally. Also, LPG sales continue to grow in double-digits, recording growth of nearly 13% YoY. To add to the marketing revenues, strong international product prices at the refinery gate enabled the boost to revenues.

Expenditure Table
(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 21.0% 25.4% 37.6% 41.6%
Purchases 66.9% 65.6% 48.0% 44.8%
Staff cost 1.4% 0.9% 1.5% 1.3%
Other expenditure 3.8% 6.2% 4.7% 6.5%

Operating margins: For 9mFY05, operating margins have declined by 230 basis points on the back of a steep rise in raw material (read crude oil) costs. To put things in perspective, crude oil prices (which constitute over 90% of raw material costs) have increased by nearly 40% during 9mFY05 as compared to the corresponding period last fiscal. Further, pricing pressure in certain states also led to lower realizations. However, strong refining margins of US$ 5.2 per barrel (US$ 3.4 per barrel during 9mFY04) enabled the company to arrest any further decline in operating margins. One thing to notice is that the company's purchasing cost (products sourced through external sources) has declined sharply. This comes on the back of duty cuts announced by the government during the current fiscal.

Eats into the bottomline: During 9mFY05, the company's net profit witnessed a decline of nearly 14% YoY on the back of rising costs and lower than proportionate rise in product prices at the retail level. During the period under review, the industry witnessed product price freeze thereby affecting margins, while on the other hand international product prices firmed up leading to higher cost at the refinery gate. Although the government did act upon this by cutting down the duties, it reduced its share of the subsidies on LPG and kerosene by nearly half, thereby resulting in a net impact of a hike in subsidies for the marketing companies. A back of the hand calculation shows that the subsidy on per cylinder of LPG touched Rs 155.

What to expect?
At Rs 424, the stock is trading at a price to earnings multiple of 6.7 times annualized 9mFY05 earnings (price to cash flow multiple of 6.1 times). Given that the company is expanding refining capacity to 12 MMTPA by the end of the current fiscal and is merging its subsidiary Kochi Refineries, its dependence on external sources is likely to reduce going forward.

Further, high refining margins, which we believe would continue over the medium term would help BPCL as after the merger, KRL's margins would add to the company's bottomline. The upgradation and expansion would enable BPCL to produce higher yield products thereby enabling higher realizations. We therefore, remain bullish on the company's prospects from a long term perspective.

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