Sep 12, 2002|
Kochi Ref: Planned shutdown kicker
After five consecutive quarters of YoY decline in sales, Kochi Refineries Ltd. (KRL) posted a sharp turnaround in turnover growth for the quarter ended June '02. Sales in the previous fiscal were impacted by lower offtake and realisation for petroleum products. The refining industry has faced a challenging 24 months with volatile crude oil prices and global & domestic economic downturn.
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KRL underperformed the industry in FY02 at the turnover level, as the company undertook a planned shut down for 53 days in first quarter of FY02. Consequently, outperformance in 1QFY03 is due to regular operations at the plant. Throughput of the company increased by 70% YoY to 2.1 m metric tonnes (MMT) during the concerned period. Having said that, on annualised basis, for 1QFY03 the company achieved operating rates of 112% with throughput on sequential basis rising by 13.5%.
International crude oil prices (Brent blend) during the concerned quarter declined by an estimated 9% YoY to $25/ barrel. And with the global economy weakening over the same period, international petroleum product prices are estimated to have remained soft, keeping gross refining margins (GRMs) under pressure. Reliance Petroleum reported marginal decline in realisations. However, contrary to our expectation, realisation at public sector refining companies has increased with feedstock (crude oil) price/ barrel rising at a faster clip, leading to lower margins. Realisation and crude procurement price for KRL increased by an estimated 22% and 28% YoY respectively. The company entered into a long term employee compensation settlement with retrospective effect in 3QFY02 leading to a jump in staff costs.
Interest expense of KRL almost tripled in FY01, as the company commissioned the diesel hydro-desulphurisation (DHDS) plant in FY00 at a cost of Rs 8.5 bn. Consequently, the interest and depreciation expenses were passed through the income statement. Over the past two quarters, interest expense, YoY, has been declining. This could be due to repayment & refinancing of debt.
KRL was acquired by Bharat Petroleum Corp. Ltd. (BPCL) at the end of FY01 for Rs 6.5 bn, as part of industry restructuring. The company operates a 7.5 MMTPA refinery. Considering the slowdown in petroleum consumption and the resultant over-capacity in the industry, KRL is unlikely to undertaken any expansion in the medium-term. Therefore, the company is a play on the refining cycle. Cost cutting is likely to be the earnings growth initiative. KRL is setting up a crude oil desk to ensure more efficient procurement of feedstock. In an effort to reduce transportation costs, a single buoy mooring (SBM) facility is being built for very large crude carriers (VLCC). Additionally, to enhance LPG market share of BPCL in the south, KRL is setting up a 70,000 TPA LPG plant at a cost of Rs 180 m. The plant is expected to be commissioned in July '03. However, the project is estimated to have a marginal impact (1.5%) on FY04E sales.
At Rs 43 the scrip is trading on a multiple of 2.8x 1QFY03 annualised earnings, which is largely due to sharp growth in earnings. The scrip generally trades in a band of 3x-6x earnings. With global economic growth likely to remain anemic in FY03 and crude oil prices remaining firm due to OPEC production cuts and geo-political instability in mid-east, we reckon refining margins are likely to be squeezed further compared to FY02. 2QFY03 throughput is not going to get any boost from 'YoY effect'.
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