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BPCL: Uncertainty looms!

Apr 28, 2006

Performance summary
Refining and marketing major, BPCL, declared its results for the fourth quarter and fiscal ended March 2006. The topline for the fiscal grew by 23% YoY while the bottomline fell by 87%, which could be attributed to higher level of subsidy burden on the company. The performance for the year would have had been worse but for the robust performance of the company during 4QFY06. In 4QFY06, while the topline grew by 34% YoY, the bottomline grew by whopping 409% primarily due to low base effect, the issuance of oil bonds by the government and greater discount from refineries.

Financial snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 159,681 213,188 33.5% 589,700 723,956 22.8%
Expenditure 154,818 193,555 25.0% 573,293 718,221 25.3%
Operating profit (EBDITA) 4,863 19,633 - 16,407 5,735 -
EBDITA margin (%) 3.0% 9.2%   2.8% 0.8%  
Other income 1,427 1,112 -22.1% 4,514 4,303 -4.7%
Interest 416 756 81.7% 1,398 2,122 51.8%
Depreciation 1,412 1,967 39.3% 5,960 6,408 7.5%
Profit before tax 4,462 18,022 - 13,563 1,508 -
Extraordinary items - - - - - -
Tax 948 139 -85.3% 3,905 210 -94.6%
Profit after tax/(loss) 3,514 17,883 - 9,658 1,298 -
Net profit margin (%) 2.2% 8.4%   1.6% 0.2%  
No. of shares (m) 300.0 300.0   300.0 300.0  
Diluted earnings per share (Rs)*         4.3  
P/E (times)         71.6  
(*trailing twelve months earnings)            

What is the company’s business?
BPCL is a refining and marketing major with refining capacity of 8.7 MMT and has more than 7,000 retail outlets and 1,000 kerosene dealers. At present, the company enjoys a market share of 30% in petrol and 26% in diesel. Also, the average fuel sales per retail outlet at 167 KL (kilolitres) per month are significantly higher than the Industry average. The company, along with its subsidiaries (Kochi Refineries and Numaligarh refineries), holds 14% of the total domestic installed refining capacity.

What has driven performance in FY06?
Realisations led topline: The company’s FY06 topline growth has been primarily a factor of improved realisations rather than volume sales with the latter having remained flat (less than 1% growth) on YoY basis. The blended realisation per MMT, however, has increased by 23% YoY, which is what is reflected in the topline growth. Further, apparently, higher realisations on non-subsidised products have also aided topline growth.

Margins slip: The operating margins of BPCL fell to 0.8% in FY06 from 2.8% registered in the previous fiscal. Also the gross refining margins (GRM’s) have fallen from US$ 4.6 per barrel to miniscule level of US$ 1.6 per barrel. Lower margins can also be explained from the fact that almost 70% of the company’s total sales are constituted by subsidised products, the prices of which are way below international prices as the government has prevented oil companies from passing on the increased costs onto consumers. In 4QFY06, however, operating margins have increased from 3% recorded in previous quarter to 9.2% in the current quarter. The reason for this increase is availability of greater discount from refineries, which is visible in the considerable reduction witnessed in ‘purchase of products for resale’ (see table below). The total discount received by the company in FY06 from government, upstream oil companies and refineries is Rs. 60918.03 m (8.42% of sales).

Expenditure break up…
As a % of net sales 4QFY05 4QFY06 FY05 FY06
(Increase)/decrease in stock -7.0% -0.6% -2.7% -0.84%
Consumption of raw material 24.0% 25.1% 23.3% 25.4%
Staff Cost 2% 1.0% 1.3% 1.0%
Purchase of products for resale 70.3% 60.3% 69.1% 67.8%
Other expenditure 8.0% 4.9% 6.2% 5.8%
Total expenditure as % net sales 97.0% 90.8% 97.2% 99.2%

The bleeding continues: Weak operating performance owing to the subsidy burden along with decrease in other income (6% YoY), increase in depreciation expenses (8% YoY) and increase in interest expenses (52% YoY) lead to further deterioration of the bottomline. Though BPCL has posted a positive bottomline growth in the quarter, the poor performance of the past three quarters has weighed heavy on the company full year performance, though the company’s 4QFY06 profits have managed to wipe out the losses of 9mFY06.

Performance over the quarters
(Rs m) 1QFY06 2QFY06 3QFY06 4QFY06
Sales growth(%, YoY) 22.6% 21.2% 13.8% 33.5%
Operating profit -192.5% -133.8% -375.5% 9.2%
Net profit growth(YoY) -392.8% -163.2% -803.0% 408.9%

What to expect?
At the current price of Rs 436, the stock is trading at a price to earnings multiple of 101 times its FY06 earnings, which is due to the fact that company has recently pulled out of losses and has reported positive bottomline number only in 4QFY06. Reluctance on the part of government to hike prices of subsidised products coupled with crude and petroleum products scaling newer higher has raised concerns about the future profitability of oil marketing companies. Thus, any significant positive move from government or softening of crude prices can have positive impact on BPCL. Currently, we believe that there aren’t any signals of softening of crude as of now, thus, only regulatory policy changes can help to resolve the petroleum products pricing issues.

However, it must be noted that there have been some initiatives being taken by the company, which are a positive from the long-term view. BPCL plans to have complete presence over the hydrocarbon value chain. Thus, the company plans to bid for E&P projects either on its own or through strategic partnerships and has estimated investments of around US$ 1 billion in E&P assets over the next 6 to 7 years. This is with the intention of securing 25% of its crude requirement and diversifying across the value chain.

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