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Research meet excerpts: BPCL - Views on News from Equitymaster
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Research meet excerpts: BPCL
Sep 10, 2004

BPCL is the second largest oil marketing company with a market share of nearly 31% in petrol and 24% diesel sales. The company operates an 8.7 MTPA (million tonnes per annum) refinery in Mumbai and is planning to hike its capacity to 12 MMTPA by the end of FY05. It currently has around 5,000 retail outlets (25% of the total number of outlets in the country) spread across the length and breadth of the country and is further setting up nearly 700 retail outlets in the current fiscal. The company has also ventured into natural gas business through stakes in Indraprastha Gas in Delhi and Petronet LNG.

Key impressions:
  • Growth in the petroleum products: The industry has witnessed robust growth during this fiscal. To put things in perspective, diesel sales grew by 12% while petrol sales touched 10%. On the other hand, naphtha and kerosene sales have dipped and LPG continues to grow at an attractive rate of 12%. Having said that, it is to be noted that the growth is inflated to an extent because of negative growth during the corresponding period last fiscal. So keeping that in perspective, the industry (petroleum products) is expected to grow at around 3% to 4% in the next few years. Also in an economy, which expects to grow at 6% to 7%, this growth in petro-products demand looks very much possible.

  • Crude prices playing spoilsport: The current fiscal witnessed a sharp spike in crude prices. However, for the last two weeks, the prices have fallen from a peak of US$ 49 per barrel. The market is very volatile largely due to the ‘uncertainty premium’ pertaining to geopolitical issues and high speculation on the part of hedge funds and other market players. BPCL expects the prices to stabilize in the range of nearly US$ 35 per barrel. At BPCL, current costs of crude ranges at an average of US$ 33 per barrel for the current month.

  • 1QFY05 results: The results have been below expectations but it has to be considered that the industry was actually selling products at a loss. Though the government has increased prices of select products, it will only reflect in the coming quarters. As for the price hikes and government policies, it is the right signals that the government has given to the stakeholders of the industry per se. It swung into action pretty much early and the fact that they are taking a hit on revenues by cutting duties shows that they are willing to bear the burden. The effect of these policies is that BPCL’s GRMs (gross refining margins) shall reduce from US$ 5.5 per barrel to nearly US$ 3.5 per barrel. However, on the marketing side, the 10% price band introduced shall prove to be a very good move from the long-term perspective.

  • Merger with Kochi Refineries: The management has just announced its desire to have KRL on its books. As for the synergies, KRL gets a direct entry into retailing business while BPCL would be in a better control of products.

  • Crude supply and storage: Over the years, BPCL’s offtake from ONGC has reduced and nearly 60% of crude requirement is imported mainly from the Middle East. The Mumbai refinery, one of the most flexible refineries in the country, has so far processed 61 different types of crude. Usually, crude inventory is stored for nearly 10 days production while products storage ranges between 2 to 3 weeks.

  • CNG business: The CNG business is a future investment for BPCL, as the company believes that gas is the fuel of the future. It is true that diesel and petrol sales are being eaten over by CNG. But looking at the dynamics of the business, BPCL is going ahead with its CNG outlets expansion programme so as to have a major share of this business. To explain the above, in Delhi, all public transport undertakings are shifting to CNG. If not BPCL, some other player would have set up outlets and BPCL would have lost out on this business. This is therefore, a conscious effort on its part to retain clientele. As for margins being affected, the margins are almost the same.

  • BPCL further plans to enter into nearly 20 cities in Maharashtra and Gujarat for gas distribution. Also, looking at the demand in the south, it has proposed to market the entire LNG being brought in by Petronet LNG. As stated earlier, CNG is a strategic business and BPCL intends to be a major player in the segment.

  • Of late, the industry is witnessing a major rush as far as setting up retail outlets is concerned. BPCL is likely to expand outlets by around 700 retail outlets in the current fiscal. As for pricing, once the private players set up a substantial number of outlets, the government would have to revise the pricing structure and provide more autonomy to the players.

  • The company plans a capital expenditure of nearly Rs 14 to Rs 15 bn every year over the next three years. Also, if the bid to acquire retail outlets in Sri Lanka were accepted, BPCL would spend an additional Rs 2.5 to Rs 3.0 bn in the country. This is a strategic move to enter into neighbouring nations so as to diversify its markets. The Sri Lankan markets, if entered into, would benefit the BPCL and KRL combine, as products would have an assured market.

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