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BPCL: Under Government mercy - Views on News from Equitymaster
 
 
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  • Aug 8, 2000

    BPCL: Under Government mercy

    Sometimes it is difficult to understand how the Government operates. A textbook reward and punishment structure might be obvious to many. However, when it comes to the Government they have a different thought process, at least in this case.

    The oil PSUs declared their first quarter results for FY01 over the last week. Due to the poor industry scenario, refining margins remaining depressed, all the companies have reported a decline in their operating margins.

    Consequently, it was a pleasant surprise, at least prima facie, to see BPCL reporting improved operating margins and profits. Unfortunately, this joy was short-lived. On further analysis it not only showed that BPCL had not beaten the trend it also raised the curtain on a disappointing story.

    (Rs m) 1QFY01
    (reported)
    1QFY01* 1QFY01#
    Sales 108,097 108,097 108,097
    Other Income 340 340 340
    Expenditue 103,423 103,423 103,423
    Operating Profit (EBDIT)** 4,674 2,454 2,454
    Operating Profit Margin (%) 4.3% 2.3% 2.3%
    Interest 492 492 492
    Depreciation 2,245 2,245 844
    Profit before Tax 2,277 57 1,458
    Extraordinary Items   2,220 2,220
    Tax 401 401 883
    Profit after Tax/(Loss) 1,876 1,876 2,795
    Net profit margin (%) 1.7% 1.7% 2.6%
    No. of Shares (eoy) 150 150 150
    Diluted Earnings per share 50.0 50.0 74.5
    (Annualised)      
    * Adjusted for prior period item      
    # Adjusted for depreciation      

    From the above table it can be observed that the result declared by BPCL is inclusive of non-recurring income (prior period adjustment). If this income is to be removed and shown as an extra ordinary item the operating margins are severely hit. In fact, it shows a very dismal picture for BPCL at the pre-tax level.

    This again is open to debate. The Government has announced a change in the LPG compensation scheme under which cylinders are to be depreciated at 16% p.a. Indian Oil (IOC) and Hindustan Petroleum (HPCL) have adopted the new policy, however, BPCL still continues to follow the old policy of depreciating at 100%. Again, if this incongruency is to be adjusted for BPCL shows a much better pre-tax picture.

    The obvious question in one's mind would be why is BPCL adopting such an accounting policy? As an outsider the possible reasons could be:

    • A higher depreciation would mean lower pre-tax profits which results in a lower tax liability.
    • But more importantly BPCL has had these dues pending for quite a while, under the cylinder compensation scheme, from the Government. If it had reported healthy financial figures it could run the risk of not receiving its outstanding dues.

    Government apathy towards its units may result in the company creating secret reserves. If the Government continues with its ways of fulfilling its obligation only when companies show they are bleeding then what are the alternatives for BPCL and the others?

     

     

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