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KRL: Margins to the rescue

Jul 26, 2001

Kochi Refineries Ltd. (KRL) has reported a significant drop in topline compared to the previous year. For FY01 the company declared a turnover growth of 23.2%. However, for 4QFY01, sales declined by 5.2%. The decline seems to have spilled into 1QFY02.

(Rs m)1QFY011QFY02Change
Sales 15,713 10,315 -34.4%
Other Income 190 70 -63.2%
Expenditure 15,321 9,579 -37.5%
Operating Profit (EBDIT) 393 736 87.5%
Operating Profit Margin (%)2.5%7.1% 
Interest 248 279 12.5%
Depreciation 248 258 4.0%
Profit before Tax88270208.6%
Tax 8 21 180.0%
Profit after Tax/(Loss) 80 249 211.3%
Net profit margin (%)0.5%2.4% 
No. of Shares (eoy) 69 138  
Diluted earnings per share2.37.2 
P/E Ratio  4.7  

Over the last quarter of the previous fiscal the slowdown tightened its grip over the economy. The malaise has debilitated industry further over the first quarter of the new fiscal. In fact, core sector (six key industries) growth in 1QFY02 was only 1% compared to 9.3% in 1QFY01. Although the refining sector grew by 6.4% in the first quarter, growth was much lower than the 34.5% rise witnessed in 1QFY01. In June '01 refining products grew by 11.6%.

Growth, which has slowed down, is respectful considering the situation in other core industries. However, KRL has reported a sharp drop in sales. This could be mainly due to a drop in volumes. The company has reported a drop of 35.4% in throughput.

The operating expenditure is also much lower due to the reduced throughput. Raw material expenditure has dropped by 38.9% YoY. The decline in costs YoY could also be due to higher operating costs incurred on the new diesel hydro-desulphurisation (DHDS) plant in the previous fiscal. Consequently, OPM has increased by 460 basis points. The lift in OPM has helped spur operating profit growth.

The quality of pre-tax earnings has improved with a recovery in operating margins. Adjusting for other income the company would have reported a loss of Rs 103 m in 1QFY01. The effective tax rate of the company has declined by 80 basis points YoY. The lower tax rate could be due to the capital expenditure of Rs 8.5 bn incurred on setting up the DHDS plant. In FY01, the effective tax rate declined by 8.8 percentage points.

Towards the end of the previous fiscal Bharat Petroleum Corporation Ltd. (BPCL) acquired 55% of the Government's holding in KRL for Rs 6.5 bn. Consequently, KRL is now a subsidiary of the refining & marketing major.

At Rs 34 the company trades on a multiple of 4.7x 1QFY02 annualised earnings. The valuations of the company have dropped from 8x in 3QFY01 to 6.4x in 4QFY01. The company had announced a 1:1 bonus in the second half of FY01, which could have led to a rise in prices. Also, markets were expecting an open offer from BPCL for acquiring the Government's stake.

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