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IBP: Crude vulnerability - Views on News from Equitymaster

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IBP: Crude vulnerability

Mar 7, 2005

Performance summary
IBP, the standalone marketing subsidiary of the country's largest downstream oil company, IOC, announced mixed results for 3QFY05. While the topline witnessed a growth of nearly 24% YoY, the company witnessed a loss during the said period on the back of rising product prices at the refinery gate and its inflexibility to increase retail prices.

What is the company's business?
IBP is a stand-alone marketing subsidiary of IOC with a strong presence in the northern rural markets. The company owns over 2,200 retail outlets and utilizes parent, IOC's infrastructure for refined products and storage. Having said that, it has a strong brand loyalty in the lubes segment and is soon to be merged with IOC, which would result in a combined retail strength of over 12,000 retail outlets between the two companies. The company also has other minor business operations, which are industrial explosives and cryogenics.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 28,318 35,029 23.7% 76,674 98,513 28.5%
Expenditure 27,827 36,002 29.4% 74,925 100,201 33.7%
Operating profit (EBDITA) 492 (973) -297.8% 1,750 (1,688) -196.5%
EBDITA margin (%) 1.7% -2.8% 2.3% -1.7%
Other income 157 121 -22.9% 380 384 1.2%
Interest - - 1 - -100.0%
Depreciation 99 129 30.0% 302 372 23.1%
Profit before tax 550 (980) - 1,827 (1,676) -
Tax 157 - - 616 - -
Profit after tax/(loss) 393 (980) - 1,211 (1,676) -
Net profit margin (%) 1.4% -2.8% 1.6% -1.7%
No. of shares (m) 22.2 22.2 22.2 22.2
Diluted earnings per share (Rs)* 70.9 72.9
(* annualised)

What has driven performance in 3QFY05?
(Rs m) 3QFY04 3QFY05 (%) change 9mFY04 9mFY05 (%) change
Petroleum 28041.6 34738.2 23.9% 75885 97742.5 28.8%
Explosives 257.4 249.3 -3.1% 672.9 674.4 0.2%
Cryogenics 19.4 41.9 116.0% 116.5 96.3 -17.3%
Volumes lead topline growth: During 3QFY05, IBP has witnessed an impressive growth of nearly 24% in the topline on the back of strong volumes growth in the northern markets, where it has a stronghold. To put things in perspective, diesel sales have witnessed growth of nearly 6% during 9mFY05 while petrol sales have also witnessed decent growth during the period. Having said that, but for the subsidy sharing, the company's topline growth would have had been much better. The table below indicates the growth rate achieved by each of its businesses.

(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 95.7% 100.8% 95.0% 99.6%
Staff cost 1.0% 0.8% 1.1% 0.8%
Other expenditure 1.5% 1.1% 1.6% 1.2%
Vulnerable to product costs: During the quarter, IBP witnessed a rise in operating expenditure, thereby resulting in a YoY dip in margins at the operating level by 450 basis points. High crude oil prices, which touched US$ 55 per barrel during the period, resulted in high product prices at the refinery gate. Lack of any refineries led to a rise in product procurement costs, which have risen by over 5% YoY. Better control over staff and other expenditures have helped the company arrest the decline.

…reflected in the bottomline: The above factor had a big impact on the bottomline while at the same time a dip of nearly 23% in other income made matters worse. During the period under review, retail product prices were not allowed to be hiked in line with international prices while at the same time, subsidies on LPG and kerosene also had a negative impact.

What to expect?
IBP, although has a stronghold in the northern markets and is gaining market share, the fact that the company lacks refinery infrastructure, exposes it to the vagaries of crude oil prices in the absence of refining margins, which would, in an ideal case, compensate for the drop in marketing margins. The company is likely to be merged with IOC in the coming fiscal and this would help the merged entity to consolidate its position in the northern markets. The merged entity would account for nearly 50% of the total retail outlets in the country while at the same time, IOC would have better control over management. Kindly click Our View to know more about the merger.

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