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KRL: Dismal performance

May 22, 2001

Kochi Refineries Ltd. (KRL) has reported a dismal performance for fiscal '01. Although the company has shown significant growth in topline, YoY, the operating performance has deteriorated. The turnover growth could be due to the higher realisations in final product prices as crude oil prices ruled firm over the concerned period.

(Rs m)4QFY004QFY01ChangeFY00FY01Change
Sales 18,689 17,716 -5.2% 57,925 71,366 23.2%
Other Income 369 390 5.7% 936 1,095 17.0%
Expenditure 17,909 17,298 -3.4% 55,009 69,323 26.0%
Operating Profit (EBDIT) 780 418 -46.4% 2,916 2,043 -29.9%
Operating Profit Margin (%)4.2%2.4%5.0%2.9%
Interest 116 269 132.2% 388 1,099 183.3%
Depreciation 157 265 68.5% 627 1,015 61.8%
Profit before Tax876275-68.7%2,8371,025-63.9%
Tax 205 23 -88.8% 485 85 -82.5%
Profit after Tax/(Loss) 671 252 -62.5% 2,352 940 -60.1%
Net profit margin (%)3.6%1.4%4.1%1.3%
No. of Shares (eoy) 69 138 69 138
Diluted earnings per share19.57.317.16.8
P/E Ratio 6.0 6.4

The turnover for 4QFY01 has declined compared to the previous year. Topline growth in the earlier quarters has been above 30%. This indicates a sudden and sharp drop in the turnover growth. Petroleum prices for 4Q were higher as compared to the previous year. Therefore, volumes could have been adversely impacted.

Operating profits have registered negative growth as expenses rose at a faster clip compared to sales. Consequently, the OPM has come under pressure. OPM has declined by 180 and 210 basis points YoY for 4Q and FY01 respectively. The drop in OPM is not surprising as oil prices skyrocketed during the year from $18 / barrel to above $30 / barrel. Oil prices did soften in 4QFY01, as global demand weakened. However, KRL has reported a sequential drop in OPM by 70 basis points.

The company has attributed the higher operating costs to the diesel hydro-desulphurisation (DHDS) plant, which was commissioned in FY00. The plant was set up at a cost of Rs 8.5 bn and is used for reducing the sulphur content in diesel from an estimated 1% to 0.3%. All refineries were required to set up this unit as per the new anti-pollution norms.

Consequently, the capital expenditure has 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, which led to the company resorting to short-term borrowings for meeting its working capital requirements. Receivables, included in income, from the Oil Co-ordination Committee (OCC) amount to Rs 494.4 m.

The higher capital expenditure has enabled the company to reduce its effective tax rate from 17% to 8% in FY01. Consequently, the tax liability has declined substantially. The company has also accrued additional tax provisions of Rs 155 m.

At Rs 43.6 the company trades on a FY01 earnings multiple of 6.4x. The multiple has declined from 8x in 3QFY01. The three year average multiple for the scrip is 6.1x.

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