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Oil marketing: 1QFY04 review

Sep 1, 2003

Post APM dismantling, oil refining and marketing companies reported strong results during FY03. Similar performance was reflected in 1QFY04 also. Will this continue for the entire financial year FY04? Let us review the consolidated results of oil marketing companies and try to analyse what is there in store for the full year. First, a review of 1QFY04 results.

Marketing combined...
(Rs m) 1QFY03 1QFY04 Change
Net sales 451,636 512,506 13.5%
Other Income 3,261 3,485 6.9%
Expenditure 429,812 486,702 13.2%
Operating Profit (EBDIT) 21,824 25,804 18.2%
Operating Profit Margin (%) 4.8% 5.0%  
Interest 3,473 1,586 -54.3%
Depreciation 6,346 7,158 12.8%
Profit before Tax 15,266 20,545 34.6%
Tax 5,400 6,331 17.2%
Profit after Tax/(Loss) 14,213 14,213 0.0%
Net profit margin (%) 3.1% 2.8%  
No. of Shares 1,417.5 1,806.9  
Diluted Earnings per share* 40.1 31.5  
P/E Ratio   12.61  
(*annualised)      

Topline of consolidated companies (IOC + HPCL + BPCL) increased by about 14% in 1QFY04. This happened despite the volumes witnessing a decline of about 3%. Though petrol, LPG and naphtha reported an increase in volumes, diesel, which forms about 45% of the volumes, witnessed a decline. Truckers had undergone a strike for about 15 days and this was the major reason for a decline in volumes.

However the topline increased. This was primarily on account of higher realisations. Prices of petrol and diesel were reduced thrice during 1QFY04. Despite this, the prevailing prices were higher than that in 1QFY03. Consequently, realisations increased and led to higher growth in topline.

Cost as a % of net sales 1QFY03 1QFY04
Stock in trade -3.9% 3.4%
Purchase for resale 59.8% 56.3%
Raw material 30.2% 26.6%
Staff costs 1.3% 1.4%
Other Exp 6.0% 4.8%
Total cost 95.2% 95.0%

Expenses also increased in line with increase in sales. However, as a percentage of sales they were down marginally and this resulted into marginal increase in operating margins during 1QFY04. Operating margins (8%) were very high during 4QFY04 on account of higher crude prices. However post that, crude prices declined and resulted into lower margins (5%) during 1QFY04.

The companies continue to take advantage of prevailing softer interest rates. This resulted into reduced interest outgo, which declined by about 54% during 1QFY04. This coupled with higher realisations led to a 44% increase in bottomline (bottomline increased by about 97% in FY03).

Will the companies continue to reflect the performance for full FY04?

Crude prices were significantly higher during 4QFY03. We do not expect prices to sustain at those levels. The prices declined after the war and were hovering around US$ 28 per barrel. Prices have been reduced thrice during 1QFY04 and despite crude prices increasing again, the companies were not allowed to increase the prices thereby impacting their marketing margins. Though the product prices have been hiked from today, we expect that the companies would not reflect performance in line with that seen in FY03 and would infact witness a decline in bottomline during full year FY04.

However from a long term perspective, prospects of the sector look attractive considering that demand in case of petrol, diesel and LPG will increase going forward. Also competition is expected to increase significantly in the sector post the entry of private players in the retailing side. The companies have started becoming more vibrant and have also started focusing on exports, as currently there is an oversupply scenario. Increase in competition can easily be gauged from the fact that a one-time commodity product is increasingly being differentiated as brands. Also given that divestment of Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL) is also gaining momentum, the sector is likely to be in the news for the rest of FY04.


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