May 10, 2004|
IBP: Merger to the rescue...
With the recent surge in global crude prices and the elections season making sure that the petroleum product prices remain 'stable', the oil marketing companies (OMCs) have been the worst hit as a result of increasing material costs without a corresponding increase in product prices.
However, with robust gross refining margins, these OMCs have been cushioned to a large extent as most of them have their own refining capacities. The one company to suffer a major setback is IBP. IBP does not have its own refineries and depends on its parent, Indian Oil Corporation (IOC) for the supply for petroleum products. The company has been the most aggressive in setting up retail outlets and has, to a large extent, eaten into its parent's market share (declined from 50% to nearly 48% in FY04). At the same time, IBP's market share has increased from around 7% to 9% in transportation fuels.
The above diagram depicts the market share of the various marketing majors in the business of transportation fuels. IOC runs away with a major share in the pie, while HPCL and BPCL have maintained their share in the market. On a comparative basis, IBP's market share is a dismal 7%. This is largely due to the fact that HPCL and BPCL have been able to eat into IOC's market share more aggressively as compared to IBP as a result of speciality grades being launched by the two. Although IBP is a strong brand in the rural areas, it compares poorly with its peers in urban and semi-urban areas.
A close look at the above chart shows that IBP's margins as compared to its peers in the marketing segment have been dismal. While, HPCL and BPCL have operating margins above 5%, that of IBP is a poor 2%. This is largely due to the fact that HPCL and BPCL have a much more integrated business model as compared to IBP. Both, HPCL and BPCL have refining capacities of their own to the tune of 13 MTPA (million tonnes per annum) and 20 MTPA respectively. Since crude prices have remained firm during the last financial year resulting in a corresponding increase in petroleum product prices, HPCL and BPCL have been able to improve margins on the basis of gross refining margins (weighted average cost of the refinery products less the cost).
At Rs 620, IBP is trading at a price to cash flow multiple of 10.4x FY03 earnings as compared to HPCL and BPCL, which are trading at a multiple of 7.5x and 8.1x respectively. We believe that since HPCL and BPCL have a better business model as compared to IBP, the two are more capable to face pricing competition and at the same time are better positioned to capture the new opportunities. However, with IOC's backing and its strong presence in the hitherto untapped rural markets, IBP can become a force in the domestic markets post merger with IOC.
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