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BPCL: Higher GRMs support margins - Views on News from Equitymaster

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BPCL: Higher GRMs support margins
Jun 18, 2015

Bharat Petroleum Corporation Ltd (BPCL) has announced results for the quarter ended March 2015. The company has reported sales decline of 31.4% YoY for the quarter while net profits decline by 29.9% YoY. Here is our analysis of the results.

Performance summary
  • Topline declines by 31.4% YoY due to lower realizations in a weak crude price environment. For FY15, topline declines by 8.5% YoY.
  • The market sales (including exports) for the quarter stood at 9.2 MT, down 1.7% YoY. Volumes in the export market remained flat YoY. For FY15, the market sales (including exports) stood at 36.65 MT, down 1.0% YoY.
  • The operating profits for the quarter decline by 29% YoY with operating profit margin at 8.8%, marginally higher than 8.5% in 4QFY14. The margins expanded slightly on account of better marketing margins and higher GRMs despite the inventory losses. For FY15, the operating profit grew by 2.6% YoY with operating profit margin at 3.5%, higher than 3.1% in FY14.
  • The net profit for the quarter declined by 30% YoY with net profit margin at 5.6%, slightly higher than 5.4% in 4QFY14. For FY15, the net profit grew by 25.2% YoY, with net profit margin at 2.1%, higher than 1.6% in FY14.
  • The crude throughput for the quarter stood at 6.05 million tonnes (MT), up 1% YoY. For FY15, the crude throughput remained flat.
  • For 4QFY15, the GRMs (gross refining margins) stood at US$ 6.96 per barrel for Mumbai refinery and US$ 8.97 for Kochi refinery. The average GRMs for the quarter stood at US$ 7.85 per barrel.
  • The net under recovery for FY15 stood at Rs 4.9 bn for the year versus a net under recovery burden of Rs 5.1 bn in FY14.
  • For FY15, the GRMs (gross refining margins) stood at US$ 3.62 per barrel, down from US$ 4.33 per barrel in FY14.
  • For the year, the company's has accounted for Rs 73 bn (down 60% YoY) compensation by the Government of India.
  • For selling sensitive petroleum products, the company was offered an upstream discount of around Rs 83.6 bn (down 46% YoY) that has been adjusted in the cost of materials.
  • The Board of Directors has recommended a dividend of Rs 22.5 per share, implying a dividend yield of 2.7% at current stock price.

Financial summary
Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 747,366 513,043 -31.4% 2,599,335 2,379,053 -8.5%
Other operating income 385 418 8.8% 1415 1816.4 28.4%
Total income 747,751 513,461 -31.3% 2,600,750 2,380,869 -8.5%
Expenditure 684,142 468,501 -31.5% 2,519,743 2,297,722 -8.8%
Operating profit (EBDITA) 63,608 44,961 -29.3% 81,007 83,147 2.6%
EBDITA margin (%) 8.5% 8.8%   3.1% 3.5%  
Other income 4,196 5,820 38.7% 14,542 22,000 51.3%
Interest 2,048 1,391 -32.1% 13,591 5,831 -57.1%
Depreciation 6,189 6,991 12.9% 22,468 25,160 12.0%
Profit before tax 59,567 42,399 -28.8% 59,490 74,155 24.7%
Profit before tax margin (%) 8.0% 8.3%   2.3% 3.1%  
Tax  18,884 13,870 -26.5% 18881 23,310 23.5%
Effective tax rate (%) 31.7% 32.7%   31.7% 31.4%  
Profit after tax/(loss) 40,684 28,529 -29.9% 40,609 50,845 25.2%
Net profit margin (%) 5.4% 5.6%   1.6% 2.1%  
No. of shares (m)         723  
Diluted earnings per share (Rs)*         70.3  
P/E ratio(x)*         11.7  
(*On a trailing 12-month basis)

What has driven performance during 4QFY15?
  • Lower realizations led to a decline in the topline. The market sales volumes also declined by 1.8% YoY while exports sales volumes remained flat (YoY) for the quarter

  • Higher GRMs led to a better performance for the quarter. GRMs have improved on account of better product cracks, better crude sourcing and implementation of CCR project. The operating margins as such expanded to 8.8%, from 8.5% in 4QFY14.

  • The bottomline for the quarter declined by 30% YoY while the net profit margin improved to 5.6% , from 5.4% in 4QFY14. With lower crude prices and better fuel price regime, the working capital situation of the company has significantly improved. The financing cost has also come down significantly thus supporting the net profit margin.

  • The net profit for the year grew 25.2% YoY with margins at 2.1% (versus margin of 1.6% in FY14). Other income grew by 51% YoY for the year and includes Rs 2.2 bn towards gain on account of foreign currency transactions and translations. In comparison, the company included Rs 6.7 bn loss under 'other expense' category last year.

    Cost breakup
    (Rs m) 4QFY14 4QFY15 Change  FY14 FY15 Change 
    Raw material cost 648,621 429,128 -33.8% 2,380,650 2,159,894 -9.3%
    as a % of sales 86.8% 83.6%   91.6% 90.8%  
    Staff cost 7,910 4,866 -38.5% 28,964 20,856 -28.0%
    as a % of sales 1.1% 0.9%   1.1% 0.9%  
    Other expenses 27,612 34,507 25.0% 110,130 116,972 6.2%
    as a % of sales 3.7% 6.7%   4.2% 4.9%  
    Total costs 684,142 468,501 -31.5% 2,519,743 2,297,722 -8.8%
    as a % of sales 91.5% 91.3%   96.9% 96.6%  
What to expect?
The numbers for the quarter are not comparable on account of timing mismatch as far as subsidy payments are concerned and inventory and forex impact.

The management has suggested that GRMs witnessed in 4QFY15 are not sustainable and are likely to decline to US$4 to US$ 6 per barrel in the current fiscal.

The company plans to invest over Rs 300 bn crore over the next four years, of which around Rs100 bn will be spent in the current fiscal, mainly on the expansion of its Kochi refinery to 15.5 mtpa from the current 9.5 mtpa. As per the management, with full capacity utilization at Kochi, the GRMs are likely to expand by US$ 2 per barrel.

For Bina refinery, the net worth stands at Rs 1100 crore while debt stands at Rs 12500 crore. The GRMs for Bina refinery stood at US$ 16.4 per barrel for the quarter while net profit for the quarter stood at Rs 4.5 bn.

Overall, diesel deregulation has brought down the working capital and interest burden and is likely to be positive for marketing margins. Kochi expansion is likely to happen by May 2016. While the company has a good exposure in upstream segment, in a weak gas price scenario, the returns from upstream business may be lower.

At current price of Rs 821, the stock is trading at trailing 12 months price to earnings ratio of 11.7 times and price to book value ratio of 2.2 times (standalone basis) with respect to our previously estimated book value in FY17. We are in the process of revising estimates for BPCL and will come up with the target price soon. Until then, we suggest investors not to Buy the stock of BPCL.

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