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BPCL: A strong quarter - Views on News from Equitymaster
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BPCL: A strong quarter
Sep 10, 2015

Bharat Petroleum Corporation Ltd (BPCL) has announced results for the quarter ended June 2015. The company has reported sales decline of 22.2% YoY for the quarter while net profits grew by 95.4% YoY. Here is our analysis of the results.

Performance summary
  • Topline declines by 22.2% YoY for the quarter..
  • Market sales (including exports) for the quarter stood at 9.27 MT, down 1.7% YoY. Decline was mainly in diesel and naphtha sales, offset by growth in petrol and LPG.
  • Operating profits for the quarter grew 155% YoY with operating profit margin at 7.3%, verus 2.2% in 1QFY15.
  • Net profit for the quarter grew by 95.4% YoY with net profit margin at 4.6%, versus 1.8% in 1QFY15.
  • Crude throughput for the quarter stood at 6.07 million tonnes (MT), up 13.7% YoY.
  • The average GRMs for the quarter stood at US$ 8.55 per barrel versus US$ 3.38 per barrel in 1QFY15.
  • The net under recovery for the quarter was nil versus under recovery Rs 5 bn in 1QFY15.
  • For the quarter, the company's has accounted for Rs 4 bn (down 83% YoY) compensation by the Government of India.
  • For selling sensitive petroleum products, the company was offered an upstream discount of around Rs 2 bn (down 95% YoY) that has been adjusted in the cost of materials.

Financial summary
Rs m 1QFY15 1QFY16 Change
Net sales 667,497 519,167 -22.2%
Other operating income 441 494 11.9%
Total income 667,938 519,661 -22.2%
Expenditure 652,701 481,481 -26.2%
Operating profit (EBDITA) 14,796 37,686 154.7%
EBDITA margin (%) 2.2% 7.3%  
Other income 10,197 3,301 -67.6%
Interest 1,948 1,147 -41.1%
Depreciation 5,572 5,372 -3.6%
Profit before tax 17,914 34,962 95.2%
Profit before tax margin (%) 2.7% 6.7%  
Tax  5,751 11,200 94.8%
Effective tax rate (%) 32.1% 32.0%  
Profit after tax/(loss) 12,163 23,762 95.4%
Net profit margin (%) 1.8% 4.6%  
No. of shares (m)   723  
Diluted earnings per share (Rs)*   86.4  
P/E ratio(x)*   9.6  
(*On a trailing 12-month basis)

What has driven performance in 1QFY16?
  • Lower realizations and decline in the market sales volumes led to a decline in the topline. However, this was offset to some extent by higher throughput and nil under recoveries for BPCL in this quarter.

  • Higher GRMs and better marketing margins led to a better operating performance for the quarter. GRMs have improved on account of better product cracks and inventory gains. As such, operating margins expanded to 7.3%, from 2.2% in 1QFY15.

  • Net profit margin for the quarter improved to 4.6%, from 1.8% in 1QFY15. With lower crude price and in a better fuel price regime, the working capital situation of the company has significantly improved. The financing cost has also come down, thus supporting net profit margin. However, a loss of 68% in other income restricted the growth in the bottom-line.

    Cost break-up
    (Rs m) 1QFY15 1QFY16 Change
    Raw material cost 619,679 445,470 -28.1%
    as a % of sales 92.8% 85.8%  
    Staff cost 7,903 6,958 -12.0%
    as a % of sales 1.2% 1.3%  
    Other expenses 25,119 29,053 15.7%
    as a % of sales 3.8% 5.6%  
    Total costs 652,701 481,481 -26.2%
    as a % of sales 97.8% 92.7%  
What to expect?

The numbers for the quarter are not comparable on account of timing mismatch as far as subsidy payments are concerned and inventory and forex impact. Both Bina and Numaligarh refinery posted strong GRMs for the quarter. However, a planned shutdown at Bina for a month impacted its profits.

Going forward, BPCL will be investing in Kochi expansion and upcoming petchem plant at Kochi.

In a scenario of declining gas and crude prices, there exists a risk for upstream projects of the company. Also, with fuel reforms in diesel and increase in competition, diesel sales volumes have declined. With private players entering retail sales, there is a risk of decline in OMC's market share. Further, high GRMs like in this quarter may also not be sustainable.

On the positive side, diesel deregulation has brought down the working capital and interest burden and is likely to boost for marketing margins. At current price of Rs 833, the stock is trading at trailing 12 months price to earnings ratio of 9.6 times. We are in the process of reviewing our estimates for BPCL and will be updating subscribers aout the target price soon. Until then, we ecommend investors not to buy the stock.

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