X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
BPCL: (C)rude Impact - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jun 11, 2004

    BPCL: (C)rude Impact

    Black gold, as crude is popularly known, is hovering above US$ 36 per barrel. Although prices of crude oil have risen to phenomenal levels earlier, it should be remembered that they were all an effect of supply side shocks. This time, high demand from developed nations such as the US and the developing economies such as China and India have led to the price momentum, with OPEC members unable to meet the demand.

    Historically, developing economies are less efficient than the developed economies in terms of oil usage and have been known to utilise more crude per unit of GDP as compared to the Organisation for Economic Cooperation and Development (OECD). Just to put things in perspective, India uses 2.5 times more crude oil for a single unit of GDP as compared to the OECD. In the face of it, we import nearly 70% of our crude requirements and domestic production has remained stagnant at around 33 MMTPA (million tonnes per annum). To add to their misery, oil marketing PSUs are a victim of subsidies and political decisions as far as pricing of products are concerned. For example, these OMCs (oil marketing companies) had to bear a loss of Rs 13 bn during FY04 on account of under-recoveries on LPG and kerosene. Also, the fact that retail product prices have not been allowed to rise for the last six months in the face of high input costs have not helped matters.

    Keeping this background, let's look at the impact of high input costs with less than proportionate price increase on the performance of BPCL. Please note that the assumptions here are that crude prices shall stabilize at US$ 35 per barrel in FY05 (US$ 1 = Rs 44.25) and that the FY04 levels of subsidies of Rs 45 per cylinder of LPG and Rs 1.6 per litre of kerosene shall continue.

    In our FY05 projections, we have estimated that crude prices will average around US$ 31 per barrel. From the above graph it becomes clear that BPCL would be one of the worst hit in case crude oil prices continue to rise and in the Indian context, stabilize at US$ 35 per barrel. Operating margins take a hit of nearly 230 basis points while the net profit margins take a hit of 160 basis points. A major reason for this drop, apart from low realisations, is that BPCL purchases petroleum products from other refineries to which it pays international parity prices at the refinery gate. To that extent, the company loses on the gross refining margins. High demand for crude is largely due to robust demand for petroleum products therefore providing robust refinery gate prices.

    At Rs 354, the stock is trading at a price to cash flow of 6.4x FY05E earnings (P/E multiple of 11.0x FY05E earnings), if crude prices are considered at US$ 35 per barrel. However, we believe crude prices shall stabilize at around US$ 31 per barrel and therefore at the current levels, the stock is trading at 4.3x FY05E earnings (P/E multiple of 6.0x FY05E earnings). The rationale behind our view is that the demand is likely to ease by the end of August when the US peak driving season comes to an end and at the same time, China has shown signals of slowing down the already overheated economy.

    The True Picture...

    In the recent times, the stock has taken a hard beating on the bourses on account of lower realisations on products and disinvestment blues. However, disinvestment is more of a sentimental reason and to that effect the prices do reflect the non-event. However, the company has plans to enter into newer areas to expand its business and is actively pursuing the use of LPG as fuel. Further, upgradation of the refinery by setting up a FCCU (Fluid Catalytic cracking unit) and HCU (Hydro cracking unit), shall enable the company to produce higher yield products thereby improving realisations and at the same time expand the operational capacity to 12 MMTPA (currently the refinery processes nearly 8.7 MMTPA). We believe this upgradation shall help the company reduce its dependence on external sources for products and at the same time, effectively save on the gross refining margins that it pays on the products purchased from external sources.

    All said and done, the stock is risky to the extent government controls the pricing of the products and subsidies eat into the profits. Currently, BPCL is one of the companies, which receives crude from ONGC at discounts on account of the latter sharing the subsidy burden. Earlier, this mechanism was to be in place only till FY04 but there are indications that this shall continue. However, if this policy is eliminated, it might increase the input costs and result in additional burden on the company. The company has announced a dividend of Rs 17.5 per share (final and interim), thereby giving a yield of 4.9% at the current price.

     

     

    Equitymaster requests your view! Post a comment on "BPCL: (C)rude Impact". Click here!

      
     

    More Views on News

    BPCL: Inventory gains boost profits (Quarterly Results Update - Detailed)

    Sep 10, 2016

    BPCL has reported 3.1% decline in the topline and 11% growth in the bottomline for the year ended June 2016.

    GAIL: A Good Show (Quarterly Results Update - Detailed)

    Mar 27, 2017

    GAIL (India) Ltd has announced results for the quarter ended December 2016. reported 9.4% year on year (YoY) decline in sales, while bottom-line grew 45.4% YoY.

    ONGC: Higher Realisations on Crude Support Performance (Quarterly Results Update - Detailed)

    Mar 17, 2017

    ONGC has announced results for the quarter ended December 2016. The company has reported 9.2 % year on year (YoY) growth in sales, while bottom-line grew 197% YoY.

    BPCL: Higher other income boosts profits (Quarterly Results Update - Detailed)

    Jan 20, 2016

    BPCL has reported 25.1 % YoY decline in the topline while bottomline for the quarter grew 119% YoY.

    BPCL: A strong quarter (Quarterly Results Update - Detailed)

    Sep 10, 2015

    BPCL has reported 22.2% YoY decline in the topline while bottomline grew by 95.4% YoY in the quarter ended June 2015.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    BPCL SHARE PRICE


    Aug 18, 2017 (Close)

    TRACK BPCL

    BPCL 5-YR ANALYSIS

    Detailed Financial Information With Charts

    COMPARE BPCL WITH

    MARKET STATS