Jun 13, 2002|
KRL: Margins make-up
This is the fifth consecutive quarterly decline in turnover for Kochi Refineries Ltd (KRL). However, the industry has experienced a challenging environment over the same period. In FY02, industry crude throughput grew by 3.8% compared to 20.3% in the previous fiscal. At the topline, for the full year, KRL underperformed industry peer, Chennai Petroleum (CPCL).
|Operating Profit (EBDIT)
|Operating Profit Margin (%)
|Profit before Tax
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Industrial slowdown over FY02 coupled with excess capacity of petroleum products has impacted industry operating rates. Also, international product prices softened with global economic downturn, which hit product realisations. Consequently, the industry and KRL had to cope with lower volumes and realisations. At the same time, reduced operating rates increases per unit cost, which could adversely impact operating margins. The underperformance in topline of KRL could be attributed largely to first quarter decline in turnover of 34% YoY. During 1QFY02, the company under-took planned shut down of 53 days, which lowered throughput by 35.4% YoY.
For FY02, throughput of the company has fallen by 9.6% YoY to 6.8 m metric tonnes (MMT) reflected in lower capacity utilisation at 91%. Industry operating rates for FY02 was 95%. We estimate realisations are down 10%, salvaged to some extent by depreciation of the rupee. The company seems to have performed better in LPG and ATF, which reported 3.5% and 4.8% growth in production. Having said that, throughput in 2HFY02 has grown by 15% over 1HFY02, which could be early indications of revival in volumes.
While sales have been sliding, operating margins of the company have improved in all the past four quarters. Performance at the operating level is driven by higher margins. Prices of crude oil, the largest constituent in operating cost, during FY02 were lower by an estimated 17.1% at $ 23.3/ barrel (Brent blend). The same is reflected in higher gross refining margins (GRMs) for the period, which increased to $2.4/ barrel compared to $1.6/ barrel in FY01. The lower throughput has also contributed to reduced raw material costs, which are down 21% YoY. The company entered into a long term employee compensation settlement with retrospective effect in 3QFY02 leading to a jump in staff costs.
The company has indicated measures to maintain firm operating margins by focusing on higher quality products, reducing operating costs and modernising refining plant. Realisations on diesel could improve, as the company completes a project for reducing sulphur content. KRL had installed a diesel hydro-desluphurisation unit in FY00. Like peers in the industry, KRL seems to be setting up a crude oil desk to ensure more efficient procurement of feedstock. In an effort to reduce transportation costs, a single buoy mooring (SBM) is being built to provide for very large crude carriers (VLCC). To enhance LPG market share of BPCL in the south, KRL is setting up a 70,000 TPA LPG plant at a cost of Rs 180 m. The plant is expected to be commissioned in July '03.
At Rs 60 the scrip is trading on a multiple of 12x FY02 earnings. Over the past 12 months the scrip has traded in a band of 4.5x - 9x earnings. Historically, the valuations have ranged between 3x-6x. The premium valuations could be due to the expected strategic disinvestment in BPCL. With change in management, the acquirer could be required to make an open offer to KRL shareholders, as per the SEBI takeover regulations.
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