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BPCL: Marketing margins save day

Aug 6, 2002

The past twenty-four months, especially the last fiscal, has been a challenging time for the refinery sector. Bharat Petroleum Corporation Ltd. (BPCL) has been able to stem the slide in sales experienced over the previous four consecutive quarters. With the domestic industry showing signs of turnaround, industry throughput is likely to have increased with higher sale of petroleum products.

(Rs m) 1QFY02 1QFY03 Change
Net sales 90,147 97,479 8.1%
Other Income 356 608 70.8%
Expenditure 85,640 92,590 8.1%
Operating Profit (EBDIT) 4,507 4,889 8.5%
Operating Profit Margin (%) 5.0% 5.0%  
Interest 721 625 -13.3%
Depreciation 712 1,010 41.9%
Profit before Tax 3,430 3,862 12.6%
Tax 1,201 1,412 17.6%
Profit after Tax/(Loss) 2,229 2,450 9.9%
Net profit margin (%) 2.5% 2.5%  
No. of Shares 300 300  
Diluted Earnings per share* 29.7 32.7  
P/E Ratio   9.1  

Having said that, crude throughput and volume sales of BPCL are lower by 14% and 2% respectively. The decline in throughput, as per company reports, is due to a planned shut down in April '02. We reckon also, that with lower refining margins, the company could have substituted own products with products purchased for re-sale to earn the higher marketing margins, which has been the trend over the past three quarters. Products purchased for re-sale has increased by 7.5% YoY in 1QFY03. The rise in sales and lower volumes points towards better realisations, which have increased by an estimated 10% YoY.

Crude oil markets, which began to heat up in 4QFY02, are likely to have remained firm through the concerned quarter leading to higher international petroleum product prices. Although, with effect from April 1, 2002, the Government dismantled the administered pricing mechanism (APM) in the petroleum sector, to ensure smooth transition, retail petroleum prices were kept under check by the administrative ministry. This could have led to reduced marketing margins. BPCL has accounted for an ad-hoc sum of Rs 2.3 bn received towards subsidy on LPG and Kerosene. A rise in raw material costs and reduction in throughput suggests that feedstock prices increased considerably, putting pressure on margins.

Interest costs, which were on a rise for the past two years, have been controlled in 1QFY03. The funds received from the Government could have helped reduce strain on cash flows for meeting working capital requirements. Depreciation costs, which were on a decline for all of last year, are higher for quarter ended June '02. This is primarily due to increase in procurement of LPG cylinders. With LPG continuing to register double digit growth, it was likely that the company could not continue lowering LPG cylinder procurement.

At Rs 297, the scrip is trading on a multiple of 9.1x 1QFY03 annualised earnings. In the past two years, scrip has been trading in a band of 3x-6x. The higher valuations are due to prospects of disinvestment. With approval from the Government, BPCL is likely to make a public offer. Reports suggest an offer price of Rs 200-300/ share. Bidding for HPCL and BPCL is likely to be aggressive, as the winner gets a foothold in the lucrative marketing business.

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