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BPCL: Awaiting price deregulation - Views on News from Equitymaster

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BPCL: Awaiting price deregulation
Feb 5, 2010

Performance summary
  • Topline grows by 1% YoY during 3QFY10 due to lower realisations.
  • EBITDA margins shrink from 4.8% in 3QFY09 to 2.0% in 3QFY10 due to higher raw material cost (as a percentage of sales).
  • Other income grows by 68% YoY during the fiscal.
  • Interest cost declines by 65% during 3QFY10.
  • Bottomline declines by 53% due to lower operating margins and higher tax outgo.


Standalone Financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 319,080 321,829 0.9% 1,088,062 847,896 -22.1%
Expenditure 303,636 315,385 3.9% 1,101,485 834,732 -24.2%
Operating profit (EBDITA) 15,445 6,444 -58.3% (13,423) 13,164  
EBDITA margin (%) 4.8% 2.0%   -1.2% 1.6%  
Other income 2,766 4,656 68.3% 8,249 15,679 90.1%
Interest 7,161 2,513 -64.9% 15,514 8,051 -48.1%
Depreciation 3,014 3,816 26.6% 8,124 9,215 13.4%
Profit before tax 8,036 4,771 -40.6% (28,813) 11,577  
Tax 38 980   108 3,233  
Profit after tax/(loss) 7,998 3,791 -52.6% (28,921) 8,344  
Net profit margin (%) 2.5% 1.2%   -2.7% 1.0%  
No. of shares (m)         362  
Diluted earnings per share (Rs)*         123  
Price to earnings ratio (x)*         5  
*On a trailing 12 months basis

What has driven performance in 9mFY10?
  • The gross refining margin for BPCL during 9mFY10 was US$ 1.44 per barrel (US$ 4.25 per barrel in 9mFY09) for its Mumbai refinery and US$ 4.79 per barrel (US$ 6.91 per barrel in 9mFY09) for its Kochi Refinery.

  • The market sales for BPCL during 9mFY10 were higher at 20.45 m tonnes (MMT) from 20.07 MMT during 9mFY09. The company registered an increase in the volume of petrol (10.7%), LPG (6.1%) and diesel (5.1%). It was offset by a reduction in the volume of jet fuel (-7.8%) and furnace oil (-7.2%).

  • BPCLs under recovery on sensitive petroleum products was partially compensated by the upstream oil companies during the period. Accordingly, a discount of Rs 21.6 bn (Rs 73.2 bn during 9mFY09) was received for the purchase of crude oil, Kerosene and LPG from ONGC and GAIL. Further, the Government of India has intimated a subsidy of Rs 15.1 bn for 9mFY09 as against oil bonds to the tune of Rs 141.5 bn for 9mFY08.

  • BPCLs raw materials cost (as a % of sales) increased by 2.6% on a YoY basis from 90.1% in 3QFY09 to 92.7% during 3QFY10.

    Cost break-up
    (Rs m) 3QFY09 3QFY10 Change
    Raw materials 287,562 298,273 3.7%
    % sales 90.1% 92.7%  
    Staff cost 7,540 3,982 -47.2%
    % sales 2.4% 1.2%  
    Other expenditure 8,533 13,129 53.9%
    % sales 2.7% 4.1%  
    Total cost 303,636 315,385 3.9%
    % sales 95.2% 98.0%  

  • Other Income for 9mFY10 includes Rs 3.6 bn towards gains on foreign exchange fluctuations (foreign exchange losses during 9mFY09 of Rs 12.9 bn were accounted as other expenditure).

What to expect?
At the current price of Rs 559, the stock trades at a multiple of 12 times our expected FY12 consolidated earnings. We continue to advise caution on the stock as interest costs and regulatory concerns will continue to impact the short-term performance of the company, while poor return on incremental capital expenditure will impact the long-term performance of the company.

Several committees in the past have recommended remedial measures. But the political ramifications are so huge that the government has not been able to follow through on any recommendation so far. The latest committee is headed by Kirit Parikh. It too has made several recommendations. Market determined prices for petrol and diesel. LPG and Kerosene prices to be linked to per capita GDP growth. Incremental taxes for oil producers. Higher excise duty on diesel cars. Link kerosene distribution to the Unique Identification number. The key question is of implementation. On paper, most of these suggestions are sensible in the long term. But given the aam aadmi mandate of the government and the short term concerns of inflation, it seems unlikely to bite the bullet when it comes to genuine deregulation of fuel prices.

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