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BPCL: Playing in the hands of… - Views on News from Equitymaster
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  • Nov 1, 2004

    BPCL: Playing in the hands of…

    Performance Summary
    BPCL, a major PSU oil refining and marketing company, announced its 2QFY05 earnings on Saturday. The company witnessed topline growth of a decent 23% while the bottomline has dipped by nearly 33% on account of government policies. The decline could be attributed to significant rise in input amidst more-or-less stable selling prices at the marketing end.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 108,864 133,741 22.9% 220,315 264,349 20.0%
    Expenditure 101,383 129,035 27.3% 207,345 256,178 23.6%
    Operating profit (EBDITA) 7,481 4,706 -37.1% 12,970 8,171 -37.0%
    EBDITA margin (%) 6.9% 3.5%   5.9% 3.1%  
    Other income 1,801 2,007 11.4% 2,599 2,555 -1.7%
    Interest 229 377 64.6% 564 604 7.1%
    Depreciation 1,597 1,625 1.8% 2,755 3,161 14.7%
    Profit before tax 7,456 4,711 -36.8% 12,250 6,961 -43.2%
    Tax 2,685 1,497 -44.2% 4,286 2,274 -46.9%
    Profit after tax/(loss) 4,771 3,214 -32.6% 7,964 4,687 -41.1%
    Net profit margin (%) 4.4% 2.4%   3.6% 1.8%  
    No. of shares (m) 300.0 300.0   300.0 300.0  
    Diluted earnings per share (Rs)* 63.6 42.9   53.1 31.2  
    Price to earnings ratio (x)   7.9     10.8  
    (* annualised)            

    What is the company’s business?
    BPCL is India’s third largest oil refining and marketing company with refining capacity of 8.7 MMTPA (million metric tonnes per annum) and over 5,500 retail outlets, spread across the length and the breadth of the country. The company is an aggressive marketing player with over 24% market share in retail fuels and 26% market share in LPG (liquefied natural gas) as against competitor HPCL, which has a market share of nearly 22% in retail fuels and 24% in LPG. BPCL is currently planning to merge subsidiary Kochi Refineries so as to add the existing synergies in the business.

    What has driven the performance?
    Volume-driven growth: The topline growth of 23% comes mainly on the back of the strong volumes being witnessed during the quarter. To put things in perspective, oil companies witnessed a 5.9% rise in 1HFY05 and the growth is expected to be in the 4% to 6% range as per the ministry officials. The company could affect a price hike on two occasions and also the fact that LPG price was hiked in the late 1QFY05 reflected during the 2QFY05. To put things in perspective, the company witnessed a growth of 6% during the 1HFY05.

    Expenditure Table
    (%) of sales 2QFY04 2QFY05 1HFY04 1HFY05
    Purchases for resale 65.9% 71.5% 66.7% 70.6%
    Consumption of raw materials 20.3% 19.3% 21.1% 19.8%
    Staff cost 1.5% 1.2% 1.6% 1.5%
    Other expenditure 5.4% 4.4% 4.8% 5.1%

    Policies play spoilsport: While the global oil players have been recording robust earnings and posting record profits, Indian oil marketing companies have been ‘LEFT’ out to face the blues of high input costs backed by a freeze in product prices. While crude oil prices touched US$ 40 during 2QFY05, discounts of Rs 5.2 bn from upstream majors such as ONGC and GAIL helped reduce any further dent in the margins. However, since BPCL depends on external refineries for products purchase to the extent of nearly 60%, high international product prices resulted in higher purchase costs thereby resulting in a more than proportionate increase in expenditure to the tune of over 27%. As a result, operating margins have nearly halved from 6.9% to 3.5% during 2QFY05.

    It all boils down to the bottomline: The bottomline has declined by nearly 33% during the 2QFY05 as a result of trickle down effect of the operating performance, being hampered by government policies. A sharp rise of nearly 65% in interest costs has resulted in a further decline in the bottomline.

    Quarterly trends
    (Rs m) 3QFY04 4QFY04 1QFY05 2QFY05
    Sales 137,627 138,357 130,608 133,741
    (%) YoY growth   0.5% -5.6% 2.4%
    Op. profit 8360 7016 3464 4706
    OPM (%) 6.1% 5.1% 2.7% 3.5%
    Net profit 4843 4139 1473 3214
    NPM (%) 3.5% 3.0% 1.1% 2.4%

    Over the last four quarters: The last four quarters have resulted in a slump for BPCL with 1QFY05 being the worst quarter in terms of the net profit margins. The 2QFY05 resulted in some reprieve largely due to the product price hike announced in June and the two hikes later in 2QFY05. The company has witnessed no major breakthrough performance in the current quarter on the back of no freedom on pricing.

    What to expect?
    At Rs 338, the stock is trading at a price to earnings multiple of 7.9x its annualized 2QFY05 earnings. The company board has given an in-principle approval for the merger of its subsidiary, Kochi Refineries and given the current trend in product prices, higher refining margins are likely to reflect in the books of BPCL. However, as a long-term perspective, it would add to the synergies, as BPCL is eyeing the Sri Lankan markets for fuel retailing and Kochi Refineries could prove to be the hub for product offtake. However, this would filter down into numbers over a long period. Given the current situation, BPCL’s performance is largely at the mercy of government policies.



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