After three successive years of strong topline growth, registering a compounded rise (CAGR) of 62% over the said period, Bharat Petroleum Corporation Ltd. (BPCL) has reported negative growth in FY02. The meteoric growth over the three year period was likely due to de-regulation of the refining sector in FY99, rising international petroleum prices, revision in retail petroleum prices and higher throughput.
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In the year ended March '02, the company, in topline growth, has underperformed industry peers. The company indicated that this is largely due to discontinuance in marketing of petroleum products of Chennai Petroleum Corp. Ltd. (CPCL). At the end of FY01, CPCL and Bongaigoan Refinery & Petrochemicals Ltd. (BRPL) were acquired by Indian Oil Corp. (IOC) while Kochi Refineries Ltd. (KRL) and Numaligarh Refinery Ltd. (NRL) were acquired by BPCL. The marketing agreement with CPCL is likely to have been terminated post acquisition by IOC. However, the company is likely to have started marketing KRL products, which had an agreement with IOC.
Downturn in the global economy, especially post September 11, coupled with domestic economic slowdown has adversely impacted the refining sector. Throughput for the industry grew only 3.8% in FY02, as compared to above 20% in previous two years. At the same time international petroleum prices declined, affecting refining realisations. BPCL has reported a 1.3% growth in throughput but volume sales have declined by 1% while realisations are estimated to be lower by 14.5%. Decline in sale of diesel and kerosene is likely to have pulled down volumes. Light distillates -- petrol, naphtha & LPG -- have performed much better, registering positive growth for the concerned period.
Operating profits have been lifted by a rise in operating margins, which have received a boost from 4QFY02 performance. HPCL, industry peer, also reported similar jump in 4QFY02 operating margins. The ascent in 4QFY02 margins is due to recovery of dues from the oil pool account towards working capital & margin revision. As per reports, the Government settled 90% of outstanding dues while the remaining 10% is to be settled on completion of audit by the Comptroller & Auditor General (CAG). Having said that, reportedly, the dues were settled through 7.5% oil bonds. Consequently, the receivables are likely to have been converted into investments and net-net no cash flows have accrued to the industry. Consequently, higher margins are an accounting entry. For the full year, BPCL has reported lower refining margins at $2.4/ barrel compared to $3.1/ barrel in FY01.
Lower petroleum prices have benefited the company, as cost of products purchased for re-sale has declined. Staff costs in 2HFY02 have declined by an estimated 22% YoY. Also, BPCL completed implementation of the enterprise resource planning (ERP) system at all locations, which could have led to improved efficiencies. These factors, along with lower crude oil prices, offered some support to margins. That said, we reckon, refining margins remained weak in the last quarter with rise in crude oil prices. Also, Government reduced refinery gate prices to accommodate higher excise duty. As indicated in our 3QFY02 report, the company is likely to have substituted own sales with products purchased for re-sale.
Interest costs have been rising over the past two years. With funds blocked in the oil pool account the company has increased borrowings to meet working capital requirements. Dismantling of administered pricing mechanism (APM) is expected to reduce outstandings with the Government and increase cash flow, which could reduce interest expense going forward. The company has reduced procurement of LPG cylinders, which has led to decline in depreciation charge. However, the company has reported a 11% increase in LPG sales, which suggests that sales to industrial sector has increased or cylinder turnover could have risen.
Under the parallel LPG marketing scheme, the company had entered into a joint venture with Royal Dutch Shell, christened Bharat Shell. The JV has been terminated, as the scheme was not successful due to subsidy allowed to public LPG marketing companies. Extraordinary items pertain to accumulated losses in the JV and provision for diminution in value of the investment.
At Rs 269 the scrip is trading on a multiple of 9.5x FY02 earnings. In the past two years, scrip has been trading in a band of 3x-6x. The higher valuations are due to prospects of disinvestment. With approval from the Governemnt, BPCL is likely to make a public offer. However, reports suggest an offer price of Rs 200-300/ share. This could be supressing stock price on the bourses. Bidding for HPCL and BPCL is likely to be agressive, as the winner gets a foothold in the lucrative marketing business. As per reports, refining throughput in the first two months has increased. Rise in oil prices could have augmented international petroleum product prices. With Asian economies registering registering higher growth, operating margins for the 1QFY03 are likely to improve.
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