Kochi Refinery: Bottomline up 218%

Kochi Refineries, a subsidiary of BPCL announced its quarterly results yesterday. The company reported a 1% increase in sales for the first quarter of FY04 while the bottomline improved by about 218% on a YoY basis. Let us take a detailed look at the results.

(Rs m)	1QFY03	1QFY04	Change
Net sales	22,500	22,686	0.8%
Other Income	45	74	64.4%
Expenditure	21,200	19,864	-6.3%
Operating Profit (EBDIT)	1,300	2,822	117.1%
Operating Profit Margin (%)	5.8%	12.4%
Interest	240	115	-52.1%
Depreciation	275	293	6.5%
Profit before Tax	830	2,488	199.8%
Tax	298	795
Profit after Tax/(Loss)	532	1,693	218.2%
Net profit margin (%)	2.4%	7.5%
No. of Shares	138.2	138.5
Diluted earnings per share*	15.4	48.9
P/E Ratio		1.5
(*annualised)

While the company reported a marginal increase in sales, it has reported that it received Rs 776 m from the government as a result of its past dues with the government. If this income is removed, we actually see a decline in its topline by about 3%. Part of this decline may be on account of the truckers' strike during the June quarter. It should also be noted that the prices of petroleum products were reduced thrice during the current quarter.

Expenses declined during the first quarter by about 6%. Raw material costs as a percentage of sales, which accounts for about 95% of its total expenses, have declined to 86% as compared to 93% for the same period last year. An appreciation in the domestic currency seems to have helped the company to reduce its expenses. This has resulted in an improvement of operating profit margin by about 660 basis points. However if we remove the dues, the operating profit margin improvement is lower at 350 basis points.

	% of net sales
	1QFY03	1QFY04
Raw materials	93.2%	82.6%
Staff Costs	0.9%	1.2%
Other Exp	1.4%	1.1%

Kochi Refinery was successful in reducing its interest outgo significantly (50%) during the first quarter and this has further helped the company to improve its profitability. On the back of reduced expenses and recovered dues from the government, the company reported a healthy 218% growth in the bottomline.

At Rs 75, Kochi Refinery is trading at a P/E multiple of 1.5x its annualised 1QFY04 earnings. The stock trades at a historical P/E band of between 3x-6x. KRL's refinery margins for the first quarter have remained at the same levels as compared to the same period last year. However on a QoQ basis, the refinery margins have declined. While crude oil prices have remained stable in the range of US$ 25 - US$ 28 post the Iraq war, we do not expect the company to show robust bottomline and topline growth as compared to FY03.