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BPCL: Reeling under crude pressure - Views on News from Equitymaster
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BPCL: Reeling under crude pressure
Nov 1, 2007

Performance summary
  • Topline declines by 5% YoY during 2QFY08, mainly due to under recovery of product prices.

  • EBITDA margins fall by 30 basis points, due mainly to rise in other expenditure.

  • Other income rises by 66% YoY during the quarter.

  • Bottomline registers a decline of 18% YoY owing to decline in operating profits and higher taxes.

  • Topline and bottomline grow 2% YoY and 112% YoY respectively in 1HFY08.

Standalone Financial snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 265,174 251,704 -5.1% 481,327 490,398 1.9%
Expenditure 248,036 236,055 -4.8% 469,645 472,689 0.6%
Operating profit (EBDITA) 17,138 15,649 -8.7% 11,682 17,709 51.6%
EBDITA margin (%) 6.5% 6.2%   2.4% 3.6%  
Other income 2,207 3,652 65.5% 3,233 7,993 147.2%
Interest 920 1,228 33.5% 1,738 2,468 42.0%
Depreciation 1,964 2,322 18.2% 3,467 4,598 32.6%
Profit before tax 16,461 15,751 -4.3% 9,710 18,636 91.9%
Tax 3,876 5,369 38.5% 3,898 6,327 62.3%
Profit after tax/(loss) 12,585 10,382 -17.5% 5,812 12,309 111.8%
Net profit margin (%) 4.7% 4.1%   1.2% 2.5%  
No. of shares (m)         361.5  
Diluted earnings per share (Rs)*         60.97  
Price to earnings ratio (x)*         5.6  
*On trailing twelve months earnings

What is the company’s business?
BPCL is a refining and marketing major with a refining capacity of 12 MMTPA (million metric tonnes per annum) at Mumbai and 7.5 MMTPA at Kochi. It has 6,553 retail outlets and 1,007 kerosene dealers. At present, the company enjoys a market share of 30% in petrol and 26% in diesel. Also, the average fuel sale per retail outlet is 158 KL to 200 KL per month (FY06), depending on the location of the outlet. Historically it has enjoyed higher throughput per outlet compared to that of the industry. The company, along with its subsidiaries, holds 14% of the total domestic refining capacity. BPCL has merged its subsidiary KRL. Besides its existing profitable JVs like Indraprastha Gas (22.5% stake) and Petronet LNG (12.5% stake), it further plans to increase its presence in the retail gas distribution segment by forming various JVs with GAIL. BPCL also plans to foray in the upstream segment so as that it can integrate its presence across the energy value chain.

What has driven performance in 1HFY08?
Growth in sales volumes: The market sales during 1HFY08 were 12.10 MMT (million metric tonnes) up from 11.20 MMT during corresponding period last year. The increase was mainly in HSD Retail (10%), MS Retail (8%), HSD Direct (9%), LPG (5%) and ATF (6%). However, the volumes declined in Naphtha (12%) and Furnace oil (3%).

Gross Refining Margins: The Gross Refining Margin (GRM) for 1HFY08 was $ 4.54 per barrel for Mumbai Refinery. It was $3.48 per barrel in 1HFY07. For Kochi refinery, the GRM was $6.32 per barrel for the first half of the year and $ 3.04 per barrel for the corresponding period last year. It may be recalled that the differential in light crude and heavy crude margins has been widening in the past few quarters and stands at $5-5.5 per barrel currently.

Favorable rupee swells other income: Depreciation in the rupee had caused losses to the company to the tune of Rs.1.6 bn during 1HFY07. It was accounted as other expenditure. The case was the opposite in 1HFY08, where the appreciation of Indian rupee helped the company gain Rs 3 bn, included in the other income. It is for this reason that other expenditure has declined by 5% during the first half this fiscal while other income has surged by 147%.

Cost break-up
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Raw materials 233,777 221,051 -5.4% 443,477 446,120 0.6%
% sales 88.2% 87.8%   92.1% 91.0%  
Staff cost 2,087 2,825 35.4% 4,237 5,625 32.8%
% sales 0.8% 1.1%   0.9% 1.1%  
Other expenditure 12,172 12,179 0.1% 21,931 20,944 -4.5%
% sales 4.6% 4.8%   4.6% 4.3%  
Total cost 248,036 236,055 -4.8% 469,645 472,689 0.6%
% sales 93.5% 93.8%   97.6% 96.4%  

Staff costs rise steadily: The Oil and Gas industry is facing a lot of pressure to retain its employees and the same is reflected in rising attrition rates and escalating staff costs. Employee costs increased by 35% during the quarter and by 33% during the first half.

Subsidy and Oil bonds come to rescue: The saga of under recoveries and subsidies continues this quarter. High crude oil and product prices could not be fully passed on to the consumers. The upstream companies partially compensated for the under recoveries to the tune of Rs 10 bn down from Rs 13 bn in 2QFY07. The topline was aided by Oil Marketing Companies’ GOI Special Bonds to the tune of Rs 25 bn in 1HFY08 as opposed to Rs 32 bn in the corresponding period last year.

What to expect?
At the current prices of Rs 340, stock is trading at price to earnings multiple of 5.6 times its trailing twelve months earnings.

Significant volatility in the crude oil prices has led to absence of visibility both in terms of topline as well as profitability. The crude oil prices, which slipped from the highs of US$ 77 per barrel, have risen back to much higher levels. With demand fundamentals expected to remain strong and supply problems from Nigeria, Angola and the northern Iraq, we do not foresee any significant reduction from the current levels. Even if the crude oil prices were to decline from the current levels and gross under recoveries were to reduce, there is the question of it translating into lower net-under recoveries for the OMCs. The net under-recoveries can remain same on the back of lower subsidy sharing by the upstream majors and lower issue of oil bonds by the government.

As far as the company fundamentals are concerned, the merger with Kochi refinery will lead to lower third party purchases as the company will be able to meet most of its marketing needs internally. This will improve the business mix going forward, resulting in greater profitability as also lower risk.

On the valuations front, due to absence of visibility, OMC stocks are narrowing the gap between price and book values. Thus, the downside to the stock from the current levels is rather limited. We had recommended ‘HOLD’ on the stock and continue to maintain our view.

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