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KRL: Swimming against the tide

Feb 26, 2002

Kochi Refineries Ltd. has not been able to stem the slide in sales it has been experiencing over the past four consecutive quarters. Reduced consumption, as the domestic economy shifted into lower gear and lower international petroleum product prices pulled down sales over the concerned periods.

(Rs m)3QFY013QFY02Change9mFY019mFY02Change
Net sales 18,274 15,897 -13.0% 53,650 44,015 -18.0%
Other Income 224 55 -75.2% 705 210 -70.2%
Expenditure 17,703 15,176 -14.3% 52,025 41,886 -19.5%
Operating Profit (EBDIT) 572 722 26.2% 1,625 2,130 31.0%
Operating Profit Margin (%)3.1%4.5% 3.0%4.8% 
Interest 285 299 5.0% 830 903 8.8%
Depreciation 258 274 6.4% 750 817 8.9%
Profit before Tax253204-19.4%750620-74.2%
Tax 124 41 -67.4% 336 194-42.2%
Profit after Tax/(Loss) 129 163 27.1% 415 426 2.8%
Net profit margin (%)0.7%1.0% 0.8%1.0% 
No. of Shares 68.9 138.5   68.9 138.5  
Diluted earnings per share*3.74.7 4.04.1 
P/E Ratio  7.8    9.0  

The 3QFY02 topline performance of the company is similar to industry peers. KRL had reported a steep decline in sales for 1QFY02, which has pulled down performance for the nine months ended December '01. An encouraging sign is the growth in throughput, which had registered a drop in the first two quarters of the fiscal. In 3QFY02, throughput grew by 7.5% YoY, which suggests that the financials have been hit by weaker realisations. Petroleum product realisations are likely to have declined by 19% YoY in the third quarter.

Having said that, decline in sales seems to be the only common feature with industry peers. Contrary to industry trends, the company has reported higher operating profits, operating margins and bottomline. Operating margins, which increased by 140 and 180 basis points for the concerned periods has helped the company register higher operating profits. Better margins is due to expenses declining at a faster clip compared to sales, despite a huge jump in staff costs. During the concerned quarter, the company entered into a long term employee compensation settlement with retrospective effect, which has led to tripling in staff costs. Expenses have been reigned in largely due to lower raw material (crude oil) costs, which is the main constituent of operating expenses. Oil procurement cost has declined by approximately 25% to $21 / barrel. With Bharat Petroleum Corp. (BPCL) acquiring KRL, contributing to the lower procurement costs could be increased bulk crude purchases. In 2QFY02, we had mentioned KRL benefitting from the BPCL effect.

Interest and depreciation charges have been kept under control. However, in the previous fiscal, these cost heads had escalated dramatically, which is leading to a lower YoY effect. Diesel hydro-desulphurisation (DHDS) plant, which was commissioned in FY00, was set up at a cost of Rs 8.5 bn. Consequently, the capital expenditure led to higher interest and depreciation expenses for the fiscal ended March '01. Higher interest could also be due to funds being blocked in the oil pool account (OPA), which led to the company resorting to short-term borrowings for meeting its working capital requirements.

At a pre-tax level, the company is showing a YoY decline in performance. This is due to a significant drop in other income. Removing other income, pre-tax profits have risen considerably, indicating improvement in quality of earnings. The company has provided for deferred taxes, as per accounting standard-22. Effective tax of the company has declined by 60 basis points during the concerned periods.

At Rs 37 the scrip is trading on a P/E multiple of 9x 3QFY02 annualised earnings, similar to the valuations in the previous quarter. The scrip normally trades in a band of 3x-6x earnings. The scrip could be remaining firm due to the likely divestment of BPCL in the early part of next fiscal. The acquirer of BPCL will also have to make an open offer to the shareholders of KRL.

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