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BPCL: An individual story

Jun 18, 2004

BPCL, the oil marketing PSU, will be heaving a sigh of relief after the government's announcement of price hikes in LPG, petrol and diesel along with excise duty cuts. It should be noted that the oil marketing companies suffered a loss to the tune of Rs 36 bn in FY04 on account of a freeze on petrol and diesel prices coupled with an under-recovery of Rs 13 bn on LPG.We had put up an article (click here to read more) on the likely impact of price hikes on the oil companies in general and now consider the impact of these price hikes with respect to BPCL.

 FY04 (MMT)FY05E (MMT)Net Increase (Rs bn)
Petrol2.5 2.6 12.0
Diesel9.9 10.3 25.8
LPG2.4 2.8 10.9
Total  48.75

The price hike shall bring in incremental revenue of Rs 48.8 bn. As per our estimates, petrol and diesel are likely to grow at 3% while LPG shall grow by 12% in terms of volumes for the industry in FY05. BPCL shall gain marginally in terms of market share and coupled with the price hike, benefit in terms of realizations.

Apart from the price hikes, it should be noted that BPCL is upgrading its capacity to 12 MMTPA (million metric tonnes per annum) from the current processing capacity of 8.7 MMTPA. This, to a large extent, shall help the company reduce its dependence on external sources (the company purchases 7 MT from other refineries) and at the same time, help the company reduce costs. The gross refinery margins are likely to remain stable, as the government has not yet declared any customs duty reductions, which play an important role in the calculations of import parity prices (basis for refinery gate prices).

At Rs 345, the stock is trading at a price to cash flow of 3.5x FY06E earnings (without price revision impact). The government has further claimed that it is in the process of finalizing a package towards the oil industry and planning to give the companies more autonomy in terms of price revisions within ‘socially acceptable' limits. To that extent, it is a positive for the sector.

However, with the history of rollbacks, we have to wait and watch as to what actually pans out in the budget for the industry. Moreover, there could be a situation the demand-supply gap (supply is already higher than demand in India now) widens forcing players to export, which is not a lucrative proposition from the margin perspective. With competition expected to increase in the retail side, there could be further squeeze on margins. To that extent, the risk profile of the stock and the sector is on the higher side.

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