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BPCL: Black and blue! - Views on News from Equitymaster
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BPCL: Black and blue!
Jul 29, 2006

Performance summary
BPCL, the refining and marketing major, has declared its 1QFY07 results. The topline, in wake of robust domestic demand, has clinched an increase of 35% YoY. Operating margins, as expected, continues to be in the negative. Increase in the interest expenditure, offsetted to an extent by higher other income, led to further decline in the bottomline of the company.

Financial Snapshot…
(Rs m) 1QFY06 1QFY07 Change
Net sales 160,157 216,153 35.0%
Expenditure 163,360 221,609 35.7%
Operating profit(EBDITA) (3,203) (5,456) -
EBDITA margins(%) -2.0% -2.5%  
Other income 826 1,026 24.2%
Interest expenses 404 818 102.5%
Depreciation 1,525 1,503 -1.4%
Profit before tax (4,306) (6,751) 56.8%
Tax 7 22 214.3%
Profit after Tax (4,313) (6,773)  
Net profit margin(%) -2.7% -3.1%  
No.of shares(m) 300 300  
Diluted earnings per share* (57.5) (90.3)  
Price to earning ratio.(x)**   N.A.  
* Annualised.
* N.A= Not applicable due to loss

What is the company’s business?
BPCL is a refining and marketing major with refining capacity of 8.7 MMT and has more than 7,000 retail outlets and 1,000 kerosene dealers. At present, the company enjoys a market share of 30% in petrol and 26% in diesel. Also, the average fuel sales per retail outlet at 167 KL (kilolitres) per month are significantly higher than the Industry average. The company, along with its subsidiaries (Kochi Refineries and Numaligarh refineries), holds 14% of the total domestic installed refining capacity

What has driven performance in 1QFY07?
Realisation driven growth: Sales in terms of volumes were 5.67 million metric tonne per annum (MMTPA), thus translating into a growth of 7.4% YoY. It is against a negative growth of 1.9% during 1QFY06. ATF registered a growth of 40% YoY, HSD (high speed diesel) clocked the growth of 14%, MS retail (5%) along with Furnace Oil (20%), Lubricants (12%) and Bitumen (9%). Growth in sales of HSD, MS and furnace oil was high due to a negative growth of these products in 1QFY06, while ATF and lubricant continued to grow. Realisation during the quarter grew by 25.7% YoY on the back of increase in product prices of unsubsidized products and increase in prices of subsidized products in July and September during previous calendar year. Recent price rise in June 2006 also improved realisation.

Margins - The same story: Crude oil prices have increased sharply over the past two years. This has led to an increase in the prices of raw materials and purchase of products for resale. Consumption of raw materials increased by 46% during the year, while volumes increased by just 7% to 8%. Thus, the growth in input cost was in the range of 36% to 38% in the quarter. Also, the purchase of product for resale increased by 36% YoY. This signifies a stable business mix of the company (depends on external products purchased for resale). The company has recently increased its refining capacity from 6.9 MMTPA (FY06) to 12 MMTPA in the beginning of FY07. This additional refining capacity is going to reduce the external dependence going forward.

Cost break up…
(Rs m) 1QFY06 1QFY07 Change
Consumption of raw material 41,333 60,278 45.8%
as a % of sales 25.8% 27.9%  
Staff Cost 1,818 2,150 18.3%
as a % of sales 1.1% 1.0%  
Purchase of product for resale 109,992 149,422 35.8%
as a % of sales 68.7% 69.1%  
Other expenditure 10217 9759 -4.5%
as a % of sales 6.4% 4.5%  

Deeper in the red: Weak operating performance has had an impact on the cash flows of the BPCL. So, the company has to resort to borrowings to meet the working capital requirements. Subsequently, the same is reflected in the doubling of interest charges during the quarter. However, other income grew by 24% YoY.

What to expect?
At the current price of Rs 310, due to the negative earnings over the last four-quarters, P/E cannot be calculated. Also, the valuation multiples do not tend to mean a lot in such a scenario. Given the fact that government is reluctant to raise prices of MS (petrol), HSD (Diesel), SKO and LPG, prospects are weak. With crude prices expected to remain firm over the medium term, profitability of OMCs will further deteriorate. In this backdrop, the risk-reward ratio is skewed towards risks.

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