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BPCL: Swung by Margins and Forex - Views on News from Equitymaster
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BPCL: Swung by Margins and Forex
Jul 30, 2007

Performance summary
  • Topline increased by 10.4% YoY while bottomline turned black

  • A relatively lower 6.8% increase in expenditure resulted in an improved EBITDA margin of 0.9% for the quarter as against a negative 2.5% in the corresponding quarter last year

  • Other income grew by 323%

Standalone Financial snapshot
(Rs m) 1QFY07 1QFY08 Change
Net sales 216,153 238,694 10.4%
Expenditure 221,609 236,634 6.8%
Operating profit (EBDITA) (5,456) 2,060 NA
EBDITA margin (%) -2.5% 0.9%  
Other income 1,026 4,341 323.1%
Interest (net) 818 1,240 51.6%
Depreciation 1,503 2,276 51.4%
Profit before tax (6,751) 2,885 NA
Tax 22 958 4254.5%
Profit after tax/(loss) (6,773) 1,927 NA
Net profit margin (%) -3.1% 0.8%  
No. of shares (m) 300.0 361.5  
Diluted earnings per share (Rs)* (74.9) 21.3  
Price to earnings ratio (x)**   4.6  
* annualised, ** on trailing twelve months earnings

What is the company’s business?
BPCL is a refining and marketing major with a refining capacity of 12 MMTPA (million metric tonnes per annum) at Mumbai and 7.5 MMTPA at Kochi. It has 6,553 retail outlets and 1,007 kerosene dealers. At present, the company enjoys a market share of 30% in petrol and 26% in diesel. Also, the average fuel sale per retail outlet is 158 KL to 200 KL per month (FY06), depending on the location of the outlet. Historically it has enjoyed higher throughput per outlet compared to that of the industry. The company, along with its subsidiaries, holds 14% of the total domestic refining capacity. BPCL has merged its subsidiary KRL. Besides its existing profitable JVs like Indraprastha Gas (22.5% stake) and Petronet LNG (12.5% stake), it further plans to increase its presence in the retail gas distribution segment by forming various JVs with GAIL. BPCL also plans to foray in the upstream segment so as that it can integrate its presence across the energy value chain.

What has driven performance in 1QFY08?
Sales volumes propel revenues: The market sales during 1QFY08 was 6.33 MMT (million metric tonnes) up from 5.78 MMT during corresponding period last year. The increase was primarily in Aviation (5.88% YoY), LPG (5.89% YoY) MS-Retail (8.26% YoY) HSD-Retail (13.14% YoY), HSD-Direct (13.72% YoY), Bitumen (30.92% YoY), Lubes (33.31% YoY) and LNG (72.42% YoY). However, LSHS (-2.63% YoY), Furnace Oil (-2.89% YoY) Naphtha (-6.47% YoY) and SKO-Retail (-0.40%) recorded a reduction in sales.

Crude margins: High crude margins contributed to a better performance in 1QFY08. It may be recalled that the differential in light crude and heavy crude margins has been widening in the past few quarters and stands at $5-5.5 per barrel currently.

The Gross Refining Margin (GRM) for Q1FY08 was $ 6.50 per barrel for Mumbai Refinery. It was $5.41 per barrel in Q1FY07. For Kochi refinery, the GRM was $7.97 per barrel this quarter and $ 5.98 per barrel for the corresponding period last year.

Forex: Depreciation in the rupee had caused losses to the company to the tune of Rs.1.5 bn during 1QFY07. It was accounted as other expenditure. The case was the opposite this quarter, where the appreciation of Indian rupee helped the company gain Rs 2.3 bn, included in the other income.

It is for this reason that other expenditure has gone down by 10%. The combined beneficial effect on the bottomline is to the tune of Rs.3.8 bn.

Cost break-up
(Rs m) 1QFY07 1QFY08 Change
Raw materials 60,278 111,518 85.0%
% sales 27.9% 46.7%  
Staff cost 2,150 2,800 30.2%
% sales 1.0% 1.2%  
Purchase of products for resale 149,422 113,551 -24.0%
% sales 69.1% 47.6%  
Other expenditure 9,759 8,765 -10.2%
% sales 4.5% 3.7%  
Total cost 221,609 227,869 2.8%
% sales 102.5% 99.1%  

Subsidy: The saga of under recoveries and subsidies continues this quarter. High crude oil and product prices could not be fully passed on to the consumers. The upstream companies partially compensated for the under recoveries to the tune of Rs 9.6 bn down from Rs 13.8 bn in 1QFY07.

E&P activity: The expense on E&P activity in 1QFY08 was Rs 117 million as compared to Rs 24 million in the corresponding period last year.

What to expect?
At the current prices of Rs 308, stock is trading at price to earnings multiple of 4.6 times its trailing twelve months earnings.

Significant volatility in the crude oil prices has led to absence of visibility both in terms of topline as well as profitability. The crude oil prices, which slipped from the highs of US$ 77 per barrel, have almost risen back to the same levels. With demand fundamentals expected to remain strong and supply problems from Nigeria and Angola, we do not foresee any significant reduction from the current levels. Even if the crude oil prices were to decline from the current levels and gross under recoveries were to reduce, there is the question of it translating into lower net-under recoveries for the OMCs. The net under-recoveries can remain same on the back of lower subsidy sharing by the upstream majors and lower issue of oil bonds by the government.

As far as the company fundamentals are concerned, the merger with Kochi refinery will lead to lower third party purchases as the company will be able to meet most of its marketing needs internally. This will improve the business mix going forward, resulting in greater profitability as also lower risk.

On the valuations front, due to absence of visibility, OMC stocks are narrowing the gap between price and book values. Thus, the downside to the stock from the current levels is rather limited. We had recommended ‘HOLD’ on the stock and continue to maintain our view.

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Feb 22, 2018 09:17 AM