Bharat Petroleum (BPCL), a Navratna PSU, is a major player in the downstream segment of refining and marketing of petroleum products in the country with a refining capacity of around 20 MMTPA (million tonnes per annum). It is a leading player in LPG, lubricants and has ventured into natural gas.
BPCL has a wide retail network of 4,854 outlets spanning across the length and breadth of the country. Further, the company also caters to more than 16 m LPG customers and has been successful in penetrating into the industrial segment with various uses of LPG. BPCL has 31.6% market share in petrol and 26.6% market share in diesel business.
BPCL has around 20 MMTPA of refining capacity (including Kochi Refineries and Numaligarh Refineries). The company's Mumbai refinery is one of the most flexible in the country having processed more than 50 varieties of crude. As a result, the company has been able to increase its value added output.
Brands are one of the biggest strengths of BPCL ('MAK' and 'Pure For Sure' are a vindication). The branding strategy of these products has been able to give BPCL a unique position in the market with MAK being one of the most recalled products on the consumers' mind. The company is therefore, on the right track as far as the Rs 60 bn lubes segment is concerned. Lubricants account for 0.6% of FY03 revenues (0.5% in FY02). Although a small portion of revenues but the lubes segment accounted for 6% of the gross marketing margins for the company.
BPCL has ventured into Petronet LNG, which recently commenced commercial operations, along with other PSUs GAIL, IOC and ONGC. BPCL has been obligated to market 10% of the 5 MMTPA of natural gas, which the company has already booked. It should be noted that major power and fertilizer units to whom BPCL once supplied naphtha, have converted to natural gas and this provides a ready market to BPCL to cater to. BPCL thus shall retain its clientele on one hand and has the opportunity to expand its horizons beyond petrol and diesel.
BPCL plans to modernize its refinery at Mumbai at a capital expenditure of Rs 15 bn. The company plans to set up crude distillation units in order to improve yields and thereby efficiency. Further, it plans to set up a hydrocracker unit so as to improve product quality. The project is slated for completion in FY05.
The company is setting up a refinery in Bina having a capacity of 6 MMTPA at a cost of Rs 64 bn. The refinery shall start commercial operations in the early FY09. This refinery shall cater to the company's northern markets, which have been witnessing a major demand-supply gap. This shall also consolidate the company's position in the northern markets.
However, concerns are
Cross subsidization of LPG and kerosene remain a major worry, as the company has to bear around Rs 106 per cylinder and Rs 3/liter of kerosene. With the Government reducing its share in subsidies by 33%, the oil marketing companies shall bear Rs 128.6/cylinder and Rs 3.8/litre of kerosene. Being an issue with major political ramifications, it remains to be seen as to whether the company shall be able to pass it on to the customers.
Oil companies were last allowed to increase petroleum product prices on December 31st, after which, the Government has asked these companies to freeze prices. At the same time, internationally crude prices have touched new peaks. With the political interference in business, these oil companies shall witness erosion of operating profits. It is thus a major concern for these companies.
The stock is currently trading at 499, implying a P/CF multiple of 5.1x our FY04 earnings estimates. BPCL has been able to increase its net profits by 60% during the 9mFY04 as compared to the corresponding period last year. This is largely due to the subsidy sharing agreement with ONGC and GAIL and also given the fact that the company improved on its gross refinery margins from US$ 2.9/barrel to US$ 3.4/barrel. While the aforementioned concerns remain for the current year, we remain positive on the company's prospects in the long-term.
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