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BPCL: Inventory losses drag profits - Views on News from Equitymaster
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BPCL: Inventory losses drag profits
Feb 20, 2015

Bharat Petroleum Corporation Ltd (BPCL) has announced results for the quarter ended December 2014. The company has reported sales decline of 10.6% YoY for the quarter while net profits stood at Rs 5.5 bn. Here is our analysis of the results .

Performance summary
  • Topline declines by 10.6% YoY.
  • The operating profits for the quarter stand at Rs 11.7 bn with margins at 2.0% as compared to a loss margin of 1.4% in the corresponding quarter last year. However, the performance across quarters is not comparable.
  • The net profit for the quarter stands at Rs 5.5 bn with net profit margins 1.0 %( versus a loss margin of 1.7% in 3QFY14).
  • The crude throughput for the quarter stood at 5.82 million tonnes (MT), up from 5.63 MMT in 3QFY15, but down sequentially.
  • The market sales (including exports) for the quarter stood at 9.25 MT, down 2.8% YoY.
  • For 3QFY15, the GRMs (gross refining margins) stood at US$ 1.46 per barrel, down from US$ 1.76 per barrel in 3QFY14.
  • During the quarter, the company's subsidy burden was nil as compared to a subsidy burden of Rs 34 bn in 3QFY14.
  • For selling sensitive petroleum products, the company was offered an upstream discount of around Rs 23 bn that has been adjusted in the cost of materials. Besides, the company has accounted for Rs 11 bn in the topline which was offered by the Government of India by way of subsidy during the quarter.

Financial summary
(Rs m) 3QFY14 3QFY15 Change  9MFY14 9MFY15 Change 
Net sales 647,342 578,728 -10.6% 1,851,969 1,866,010 0.8%
Other operating income 334 417 24.9% 917 1289 40.6%
Total income 647,676 579,145 -10.6% 1,852,886 1,867,299 0.8%
Expenditure 656,834 567,445 -13.6% 1,835,601 1,829,222 -0.3%
Operating profit (EBDITA) -9,158 11,700 nm 17,285 38,077 120.3%
EBDITA margin (%) -1.4% 2.0%   0.9% 2.0%  
Other income 2,508 3,505 39.7% 10,459 16,289 55.7%
Interest 3,045 1,201 -60.6% 11,542 4,440 -61.5%
Depreciation 5,592 6,265 12.0% 16,279 18,170 11.6%
Profit before tax -15,288 7,740 nm -77 31,756 nm
Profit before tax margin (%) -2.4% 1.3%   0.0% 1.7%  
Tax  -4,398 2,228 nm -3 9,440 nm
Profit after tax/(loss) -10,889 5,512 nm -75 22,316 nm
Net profit margin (%) -1.7% 1.0%   0.0% 1.2%  
No. of shares (m)         723  
Diluted earnings per share (Rs)*         87.1  
P/E ratio(x)*         8.5  
(*On a trailing 12-month basis)

What has driven performance during the quarter?
  • The net sales for the quarter declined by 10.6% YoY.

  • The company reported operating profit margin of 2.0% versus loss in 3QFY14.The performance this quarter can not be compared to 3QFY15 because company bore nil subsidy burden during the quarter as compared to Rs 34 bn subsidy burden in 3QFY15. Further, during the quarter, the company witnessed forex loss of Rs 1.5 bn as compared to a gain of Rs 3 bn in the corresponding quarter last year. The company also suffered huge inventory losses during the quarter on account of decline in the crude price.

    Cost breakup
    (Rs m) 3QFY14 3QFY15 Change  9MFY14 9MFY15 Change 
    Raw material cost 632,190 536,573 -15.1% 1,732,029 1,730,766 -0.1%
    as a % of sales 97.7% 92.7%   93.5% 92.8%  
    Staff cost 6,059 2,305 -62.0% 21,054 15,990 -24.1%
    as a % of sales 0.9% 0.4%   1.1% 0.9%  
    Other expenses 18,586 28,567 53.7% 82,518 82,466 -0.1%
    as a % of sales 2.9% 4.9%   4.5% 4.4%  
    Total costs 656,834 567,445 -13.6% 1,835,601 1,829,222 -0.3%
    as a % of sales 101.5% 98.1%   99.1% 98.0%  

  • The company reported net profit margins of 1.0% during the quarter as the net under recovery burden was almost nil and on account of upstream and Government's support on sale of sensitive petroleum products. The interest burden for the quarter came down by 60% YoY due to the lower under recovery burden.
What to expect?

While the company reported profits for the quarter, it had to face huge inventory losses due to sharp fall in crude prices.

The GRMs for BINA refinery came in at US$ 2.5 per barrel for nine months and it incurred losses at the bottomline level. The GRMs for Numaligarh refinery stood at US$ 11.5 per barrel and net profits were above Rs 3 bn

In the 9 months, the management has incurred a capex of around Rs 67 bn. For FY16, the capex guidance is Rs 90 bn, of which Rs 14 -Rs 15 bn will be spent on upstream assets.

The company is planning to invest further in upstream segment and is planning expansion at Kochi refinery.

With diesel deregulation, there is a lot of relief on the working capital front as can be seen from the sharp decline in interest costs for the quarter. Further, the management expects to earn better margins on diesel going forward. However, it may face some competition from private players.

Still, BPCL is better placed than its peers because of its exposure to E&P (Exploration and Production) segment, though falling LNG and crude prices could be a risk. We believe investors should avoid buying the stock at current prices as current valuations already capture the positives and leave limited upside potential.

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