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BPCL: Improving business mix!

Feb 1, 2007

Introduction to results
BPCL, the refining and marketing major, has declared its 3QFY07 and 9mFY07 results. Increased demand for petroleum products along with an assurance of the issuance of oil bonds by the government has led to a topline growth of 20% YoY for 3QFY07. Consequently, the operating profits have improved significantly over the corresponding period previous year. Increased interest expenditure coupled with higher depreciation and tax outgo have however, restricted the bottomline growth to an extent.

Financial snapshot*…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 202,541 242,056 19.5% 543,930 734,337 35.0%
Expenditure 212,227 235,164 10.8% 553,522 712,915 28.8%
Operating profit(EBDITA) (9,686) 6,892   (9,592) 21,422 NA
EBDITA margins(%) -4.8% 2.8%   -1.76% 2.9%  
Other income 1,074 1,487 38.5% 3,468 4,785 38.0%
Interest expenses 689 1,298 88.4% 1,620 3,126 93.0%
Depreciation 1,753 2,484 41.7% 5,380 6,263 16.4%
Profit before tax (11,054) 4,597   (13,124) 16,818  
Tax 264 1,562 491.7% 799 5,463 583.7%
Profit after Tax (11,318) 3,035   (13,923) 11,355  
Net profit margin(%) -5.6% 1.3%   -2.6% 1.5%  
No.of shares(m) 361.5 361.5   361.5 361.5  
Diluted earnings per share (31.31) 8.40   (38.51) 31.41  
Price to earning ratio.(x)**         8.5  
* From FY07 onwards, numbers are for BPCL merged with Kochi Refineries, thus numbers for 9mFY06 have been restated.
** Based on annualised Earnings.

What is the company’s business?
BPCL is a refining and marketing major with refining capacity of 12 MMTPA (million metric tonnes per annum) and has more than 7,000 retail outlets and 1,000 kerosene dealers. At, present the company enjoys a market share of 30% in petrol and 26% in diesel. Also, the average fuel sale per retail outlet was 158 KL to 200 KL per month (FY06), depending on the location of the outlet. Historically it has enjoyed higher throughput per outlet compared to that of industry. The company, along with its subsidiaries holds 14% of the total domestic refining capacity. BPCL merged its subsidiary KRL with itself recently. Besides its existing profitable JVs like Indraprastha Gas (22.5% stake) and Petronet LNG (12.5% stake), it further plans to increase its presence in the retail gas distribution segment by forming various JVs with GAIL. BPCL also plans to foray in the upstream segment so as that it can integrate its presence across the energy value chain.

What has driven performance in 3QFY07?
Sales volumes, oil bonds propel revenues: Sales volumes during 3QFY07 increased from 5.61 MMT to 5.94 MMT registering a growth of 5.9% over the corresponding period. Lower base coupled with winning back market share from Reliance in the retail fuels led to higher than normal growth rate. It gets substantiated from the fact that during 9mFY07, BPCL registered a growth of 16% YoY in HSD (retail) and 5.8% YoY in MS (retail). Major volume driver besides HSD (retail) and MS (retail) were ATF (34.8% YoY), LPG (5% YoY), lubricants (10% YoY) and LNG (32% YoY). In order to compensate the oil marketing companies for under recoveries, the government has given assurance for the issue of oil bonds. BPCL has accounted for Rs 11.4 bn (4.7% of the net sales of the quarter) in the oil bonds scheme, which has led to significant improvement in the revenues and the realisations for the company.

Oil bonds boost realisations: While the capacity utilization declined marginally during the quarter owing to a lower crude throughput to the tune of 5% YoY, the same increased during 9mFY07 due to increase in crude throughput by 18% YoY. This reflects the improving business mix of the company as this has led to lower third party purchases. Purchase of products for resale, which was 54% of the net sales during 3QFY06, reduced to 48% in 3QFY07.

GRMs for 9mFY07 were US$ 3.12 per barrel (compared to US$ 2.41 in 9mFY06) for the Mumbai refinery, while the same for Kochi refinery was US$ 2.2 per barrel (US$ 3.91 in 9mFY06).

Assurance of the issuance of oil bonds for 3QFY07 to the tune of Rs 11.4 bn led to improvement in realisation and consequently the profitability of the company, as excluding the impact of the same, EBDITA margins turn negative.

Expenditure break –up…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Consumption of raw material 102,967 96,300 -6.5% 220,053 322,129 46.4%
as a % of sales 50.8% 39.8%   40.5% 43.9%  
Staff Cost 1,876 2,651 41.3% 5,818 7,152 22.9%
as a % of sales 0.9% 1.1%   1.1% 1.0%  
Purchase of product for resale 96,570 126,491 31.0% 293,433 350,471 19.4%
as a % of sales 47.7% 52.3%   53.9% 47.7%  
Other expenditure 10,814 9722.0 -10.1% 34,218 33,253 -2.8%
as a % of sales 5.3% 4.0%   6.3% 4.5%  

Working capital blues: Subsidized sales of four major petroleum products have adversely affected the working capital position of the company. The same is reflected by the fact that company had to resort to borrowing to meet the requirements. Consequently, the interest expenditure for the quarter increased by as much as 89% YoY. Other income during the quarter increased by 39% YoY and it includes the interest on the oil bonds issued during 4QFY06.

What to expect?
At the current prices of Rs 355, stock is trading at price to earnings multiple of 8.5 times its annualised 9mFY07 earnings.

Significant volatility in the crude oil prices has led to absence of visibility both in terms of topline as well as profitability. The crude oil prices, which slipped from the highs of US$ 77 per barrel to US$ 50 per barrel, have risen back to above US$ 57 per barrel. With demand fundamentals expected to remain strong, we do not foresee any significant reduction from the current levels. Even if the crude oil prices were to decline from the current levels, gross under recoveries are likely to reduce. However, will it translate into lower net-under recoveries for the OMCs, is a million dollar question. As the net under-recoveries can remain same on the back of lower subsidy sharing by the upstream majors and lower issue of oil bonds by the government.

As far as the company fundamentals are concerned, with the recent merger with Kochi refinery, the business mix is expected to improve going forward. To put things in perspective, this will lead to lower third party purchases as the company will be able to meet most of its marketing needs internally. This will not only improve profitability but will also lower the business risk of the company.

On the valuations front, due to absence of visibility, OMC stocks are narrowing the gap between price and book values. Thus, the downside to the stock from the current levels is rather limited. We had recommended ‘HOLD’ on the stock and continue to maintain our view.

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