BPCL, one of the major players in the refining and marketing segment, announced its financial results yesterday. The topline of the company has increased by about 22% while the bottomline reported a significant growth of 47% in FY03 (the highest in the last three years). One of the major reasons for this increase is the deregulation in the oil sector, which happened at the start of FY03.
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As compared to a decline in the topline observed last year due to an economic slowdown, the company has reported a 22% growth in FY03. Though the crude throughput of the company declined marginally in FY03, sales are higher by 4%. However, the sharp spurt in petrol and diesel prices during the course of FY03 has benefited BPCL immensely (prices of the petrol and diesel increased by about 26% and 33% in FY03). This is indicative from the fact that while volumes has grown by 4%, topline growth stands at 22% in revenue terms. The increase is on account of higher sales of petrol (8.7%), LPG (13.5%), diesel (2.8%) and furnace oil (3.9%). However the decline in sales in naphtha (-8.4%) and kerosene (-4%) restricted the growth in the topline.
The government continues to subsidize prices of LPG and kerosene (however, compared to BPCL itself bearing the difference in prices before APM dismantling, the government would reimburse starting FY03 to respective oil companies from budgetary allocations). The company realised the subsidy on these products from the government in December 2002 and this also added to the gains.
Operating margin of the company increased marginally by only 30 basis points in FY03. This was on account of the strengthening crude oil prices, which led to higher raw material expenses (raw material costs as a percentage of sales increased from 19% in FY02 to 23%. This is mainly because of the strengthening crude prices internationally on account of the uncertainty of the US invasion on Iraq. Another major reason for the rise in the expenditure was on account of increase in purchase price of the products for resale. But the gross refining margin increased from Rs 858 per MT in FY02 to Rs 1,350 per MT in FY03.
The bottomline of the company increased significantly in FY03 and was up by 47%. Apart from spurt in revenues and improvement in margins, lower interest expenses have added to the bottomline growth. In order to meet the challenges arising from the entry of the private and foreign players, the company has taken new initiatives. Speed, the premium product in petrol, was launched in FY03. Along with these, the campaign of Pure for Sure is expected to benefit the company in the long run.
At Rs 269, the company is trading at a P/E multiple of 6.5x for FY03 earnings. The company plans to add about 1,000 new retail outlets (currently it has about 4,800 outlets) in FY04 to face competition. This apart, the company has been successful in increasing the market share in LPG and other petroleum products. BPCL has plans to increase refining capacity by 3.5 MT (41% of existing capacity of 8.5 MT). Fundamentally speaking therefore, we remain positive on the long-term revenue prospects of BPCL.
The stock has been on the rise in the recent past encouraged by the government's initiative on the disinvestment front (it has plans to complete the proposed public offering by February 2004). Though this is a positive, it remains to be seen how the government goes about this process considering its past track record. If the divestment goes through smoothly, there is likely to be correction in valuation accorded to this refining major.
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