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BPCL: Under pressure

Feb 7, 2002

Oil refining & marketing major, Bharat Petroleum Corporation Ltd. (BPCL), has reported a dismal performance in 3QFY02. The slowdown, which many thought was at its peak in 2QFY02, seems to have intensified during the quarter ended December '01. The negative growth in sales has increased over the last three consecutive quarters. The lows in the economy touched in October and November of last year seem to be reflected in the results.

(Rs m)3QFY013QFY02Change9mFY019mFY02Change
Net Sales 106,412 88,187 -17.1% 300,828 265,943 -11.6%
Other Income 583 479 -17.8% 1,282 1,522 18.7%
Expenditure 103,499 84,414 -18.4% 285,886 253,844 -11.2%
Operating Profit (EBDIT) 2,913 3,773 29.5% 14,942 12,099 -19.0%
Operating Profit Margin (%)2.7%4.3%5.0%4.5%
Interest 675 791 17.2% 1,866 2,257 21.0%
Depreciation 1,495 1,498 0.2% 5,437 3,203 -41.1%
Profit before Tax1,3261,96348.0%8,9218,161-8.5%
Extraordinary items - (578) - (578)
Tax 190 666 250.5% 2,320 2,816 21.4%
Profit after Tax/(Loss) 1,136 719 -36.7% 6,601 4,767 -27.8%
Net profit margin (%)1.1%0.8%2.2%1.8%
No. of Shares 150 300 150 300
Diluted Earnings per share*15.19.629.321.2
P/E Ratio29.613.4

As indicated by the company, the poor performance is primarily due to the sharp drop in realisations. While sale volumes have remained flat, realisations have declined by an estimated 17.8% and 11.1% over the quarter and nine months ended December '01. The decline in dollar terms is even larger. The global economic downturn coupled with events of September 11 put the breaks on economic growth. The subsequent fall in petroleum product demand led to dramatic slide in product prices. Further, sales have been impacted by the domestic economic slowdown. Over the nine month period, company sales of diesel and kerosene, the largest constituents in petroleum consumption, have recorded a decrease of 4% and 6% respectively. This has been offset by growth in petrol, naphtha and surprisingly, aviation turbine fuel (ATF).

Having said that, the decline in sales has been accompanied by a similar slide in operating costs, which has helped protect margins. The real gains have accrued from lower refinery gate prices on products meant for re-sale. Also, the company has benefited from lower oil prices. In 3QFY01, oil prices were trading near to their 10 year highs at approximately $30/ barrel (Brent). Over the quarter ended December '01, oil prices cooled down by an estimated 23% to $ 20/ barrel. Raw material costs for the quater declined by 6.5% but were higher for the nine month period, which is largely due to higher throughput. This led to lower margins for the concerned period. While lower oil prices offered some respite, final product prices declined at a faster clip, keeping pressure on gross refining margins (GRMs). In fact, GRMs for 9mFY02 were down to $2.4/ barrel, as compared to $3.8/ barrel in the corresponding period of the previous year.

Interest costs seem to be perpetually rising over the last eighteen months. With funds blocked in the oil pool account the company has increased borrowings to meet working capital requirements. The decline in product prices has not been sufficient to cover the subsidy element, keeping the oil pool account in deficit. Depreciation costs are lower for the nine month period, YoY, as the company has reduced procurement of LPG cylinders. LPG cylinder depreciation charge has reduced by 66% for the concerned period. BPCL continues with its policy of depreciating LPG cylinders at 100%.

Going forward, the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC producers have attempted to bring about better demand supply balance in the oil markets by regulating production. Stable oil prices and a revival in the global economy could lift product prices leading to higher GRMs in FY03. That said, recently, the Government further reduced refinery gate prices to allow for higher excise duty. Consequently, net sales could remain under pressure, while the company could increase offtake of products for re-sale to protect operating margins.

At Rs 284 the BPCL scrip trades on a multiple of 13.4x 9mFY02 annualised earnings. This is significantly higher than the scrip's upper P/E band of 8x. The scrip for most part of the fiscal was trading on a multiple of 6x earnings. Revaluation of marketing assets post IBP sale coupled with fresh announcements by the Disinvestment ministry on privatisation of HPCL and BPCL has got investors excited. One should tread cautiously, as APM dismantling and speed of disinvestments could disappoint.

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