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BRPL: Riding high on the uptrend… - Views on News from Equitymaster

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BRPL: Riding high on the uptrend…

Feb 15, 2005

Performance Summary
Bongaigaon Refineries (BRPL), a standalone refining subsidiary of the country's largest downstream oil company, IOC, had announced its 3QFY05 results during the last week of January. While the topline has witnessed a YoY growth of nearly 61%, the bottomline has improved by 41% YoY. However, higher crude prices and lower excise under-recoveries have eaten into operating margins.

What is the company's business?
BRPL is a standalone refinery of IOC in the North East and caters to the parent's marketing requirements in the region. The company has a refining capacity of 2.35 MMTPA (million tonnes per annum) and has an integrated petrochemicals complex, which helps produce value added products. BRPL recently entered into an alliance with Reliance Industries in the petrochemicals business.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 7,316 11,738 60.5% 21,012 33,216 58.1%
Expenditure 5,889 9,818 66.7% 16,785 26,948 60.6%
Operating profit (EBDITA) 1,426 1,920 34.6% 4,228 6,268 48.3%
EBDITA margin (%) 19.5% 16.4%   20.1% 18.9%  
Other income 53 59 12.7% 143 165 15.3%
Interest 36 15 -58.1% 122 35 -71.7%
Depreciation 77 79 2.6% 228 260 14.0%
Profit before tax 1,366 1,885 38.0% 4,020 6,138 52.7%
Tax 414 549 32.5% 1,159 1,871 61.4%
Profit after tax/(loss) 951 1,336 40.5% 2,861 4,268 49.2%
Net profit margin (%) 13.0% 11.4%   13.6% 12.8%  
No. of shares (m) 199.8 199.8   199.8 199.8  
Diluted earnings per share (Rs)* 19.0 26.7   19.1 28.5  
Price to earnings ratio (x)         3.1  
(* annualised)            

What has driven performance in 3QFY05?
Upturn in product prices doing wonders: During 3QFY05, BRPL has witnessed an impressive growth of nearly 61% in the topline on the back of strong realizations aided by the firm international product prices. Post APM dismantling, refineries are compensated at the international prices and BRPL, with its high value add–high yield products has been able to improve realizations. Further, the continuing uptrend in the petrochemicals cycle has also helped the company in improving the topline. Given the backdrop of better realizations, the PSU refineries operated at higher than the rated capacity.

(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 74.2% 74.7% 73.3% 72.8%
Staff cost 2.5% 1.8% 2.8% 1.9%
Other expenditure 3.9% 7.1% 3.8% 6.5%

Crude and other expenditure eat into margins: During the quarter, BRPL witnessed a dip of 310 basis points in operating margins on the back of rising raw material (crude oil) prices and higher other expenditure. The other expenditure component for 3QFY05 includes under recoveries of Central Sales Tax (CST), thereby resulting in lower operating margins despite strong GRMs (gross refining margins) of US$ 9.5 per barrel, as compared to US$ 5.3 per barrel in the corresponding period last fiscal. Despite higher capacity utilization (98% as compared to 89.5% during the corresponding quarter last fiscal) and the resultant higher crude throughput of nearly 11% YoY, operating margins dipped.

Lower interest outgo helps bottomline growth: BRPL has witnessed a jump of nearly 41% YoY in the bottomline during the quarter. This comes on the back of higher product prices and controlled costs in terms of interest expenditure, which declined by over 58% as a result of reduction in debt. Further, a 13% growth in other income has also helped the company improve the bottomline.

What to expect?
At Rs 89, the stock is trading at a price to earnings multiple of 3.1 times its annualized 9mFY05 earnings. Given the current strength in crude oil prices and firm international product prices on the back of robust demand, BRPL is likely to witness strong refining margins going forward. Also helping the company is the uptrend in the petrochemicals business.

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