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BPCL: No end to under-recovery - Views on News from Equitymaster
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BPCL: No end to under-recovery
Aug 3, 2010

BPCL has announced its 1QFY11 results. The company has reported a 34% YoY growth in sales and a negative bottomline. Here is our analysis of the results.

Performance summary
  • Topline grows by 34% YoY during 1QFY11.
  • EBITDA margins turn negative from 3% in 1QFY10.
  • Other income declines by 53% YoY during the quarter.
  • Interest cost declines by 19% during 1QFY11.
  • Bottomline turns negative primarily on the back of lower operating margins.

Standalone Financial snapshot
(Rs m) 1QFY10 1QFY11 Change
Net sales 255,144 342,325 34.2%
Expenditure 247,474 356,384 44.0%
Operating profit (EBDITA) 7,670 (14,059)  
EBDITA margin (%) 3.0% -4.1%  
Other income 6,812 3,209 -52.9%
Interest 2,866 2,324 -18.9%
Depreciation 2,311 4,007 73.4%
Profit before tax 9,306 (17,181)  
Tax 3,165 -  
Profit after tax/(loss) 6,141 (17,181)  
Net profit margin (%) 2.4% -5.0%  
No. of shares (m)   361.5  
Diluted earnings per share (Rs)* (22.0)  
*On a trailing 12 months basis

What has driven performance in 1QFY11?
  • The average gross refining margin for BPCL during 1QFY11 was US$ 3.57 per barrel, as against US$ 3.17 per barrel in 1QFY10.

  • The market sales for BPCL during 1QFY11 were higher at 7.34 m tonnes (MMT) from 6.94 MMT during 1QFY10. The company registered an increase in the volume of petrol (12.4%), jet fuel (38.4%) and diesel (14.2%). It was offset by a reduction in the volume of Naptha (-29.2%) and furnace oil (-34.4%).

  • BPCL's under recovery on sensitive petroleum products was partially compensated by the upstream oil companies during the period. Accordingly, a discount of Rs 15.5 bn (Rs 1.6 bn during 1QFY10) was received for the purchase of crude oil, Kerosene and LPG from ONGC and GAIL.

  • BPCL's raw materials cost (as a % of sales) increased by 8.6% on a YoY basis from 88.9% in 1QFY10 to 96.5% during 1QFY11.

    Cost break-up
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 226,780 330,287 45.6%
    % sales 88.9% 96.5%  
    Staff cost 4,240 5,412 27.7%
    % sales 1.7% 1.6%  
    Other expenditure 16,453 20,685 25.7%
    % sales 6.4% 6.0%  
    Total cost 247,474 356,384 44.0%
    % sales 97.0% 104.1%

  • Other expenditure for 1QFY11 includes Rs 3.4 bn towards losses on foreign exchange fluctuations (foreign exchange gains during 1QFY11 of Rs 2.3 bn were accounted as other income).

What to expect?
At the current price of Rs 653, the stock trades at a multiple of 19 times our estimated FY13 earnings. We continue to advise caution on the stock as interest costs and regulatory concerns will continue to impact the short-term business performance of the company, while poor return on incremental capital expenditure will impact the long-term performance of the company. Although the government has taken steps towards the deregulation of petrol prices, given their ‘aam aadmi' mandate and the political opposition to such a move, it seems unlikely that a genuine structural change will actually be sustained. Moreover, the government's resolve for market determined prices will be severely tested once crude oil prices begin their upward move from current levels.

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