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Kochi Refineries: Riding the wave - Views on News from Equitymaster
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  • Nov 2, 2004

    Kochi Refineries: Riding the wave

    Introduction to results
    BPCL's pure refining subsidiary, Kochi Refineries, announced 2QFY05 results last week. The company witnessed robust topline growth of 36% YoY during the quarter while the bottomline jumped by a strong 167% on the back of firm international product prices and higher volumes in the domestic markets.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 22,604 30,718 35.9% 45,568 60,783 33.4%
    Expenditure 21,479 27,592 28.5% 41,671 54,802 31.5%
    Operating profit (EBDITA) 1,125 3,126 177.9% 3,897 5,981 53.5%
    EBDITA margin (%) 5.0% 10.2%   8.6% 9.8%  
    Other income 255 48 -81.2% 379 135 -64.4%
    Interest 99 87 -12.1% 214 169 -21.0%
    Depreciation 294 302 2.7% 587 631 7.5%
    Profit before tax 987 2,785 182.2% 3,475 5,316 53.0%
    Tax 330 1,030 212.1% 1,125 2,030 80.4%
    Profit after tax/(loss) 657 1,755 167.1% 2,350 3,286 39.8%
    Net profit margin (%) 2.9% 5.7%   5.2% 5.4%  
    No. of shares (m) 138.5 138.5   138.5 138.5  
    Diluted earnings per share (Rs)* 19.0 50.7   33.9 47.5  
    Price to earnings ratio (x)   3.9     2.6  
    (* annualised)            

    What is the company's business?
    Kochi Refineries is a stand-alone refinery with a capacity of 7.5 MMTPA (million tonnes per annum). The refinery feeds BPCL's marketing network in the Southern region and is currently planning to foray into the retail-marketing venture with a regional bias, thereby riding high on its parent's retail marketing success. Given the synergies between the BPCL and Kochi Refineries, the parent is mulling the plans of a merger.

    What has driven performance in 1QFY05?
    Making hay while the sun shines: Post APM dismantling, it was argued that there is no space for standalone refineries to survive. However, of all the oil companies, pure refining majors have been the most profitable in recent times. Kochi Refineries witnessed topline growth of 36% on the back of strong product prices and higher demand. To put things in perspective, petrol and diesel prices crossed US$ 50 per barrel during 2QFY05 in the international markets and given that Kochi derives import parity prices for its products sold (i.e. realises prices for products sold in India) in the domestic market, the topline has surged.

    (%) of sales 2QFY04 2QFY05 1HFY04 1HFY05
    Consumption of raw materials 90.4% 85.6% 87.4% 85.2%
    Staff cost 0.8% 0.7% 1.0% 0.8%
    Other expenditure 3.8% 3.6% 3.1% 4.2%

    Robust refining margins: On a YoY comparison, operating margins have more than doubled (up 520 basis points or 5.2%). Given the firm international product prices in the face of high demand, Kochi Refineries was able to ride the wave with higher capacity utilization and better refining margins (stood at US$ 5.6 per barrel in 2QFY05 as against US$ 2.5 per barrel in the corresponding period last fiscal). Refining margins in 1QFY05 was at US$ 4.9 per barrel.

    Net profit: Higher than expected realizations and a controlled expenditure pattern helped BPCL post a 167% jump in the bottomline during 2QFY05 as compared to the corresponding period last fiscal. A further reduction of 12% in interest costs also helped to boost gains. But for the 87% decline in other income, the bottomline could have been significantly higher.

    (Rs m) 3QFY04 4QFY04 1QFY05 2QFY05
    Sales 24,117 30,123 29,258 30,718
    Op. profit 1,964 4,040 2,855 3,126
    (%) OPM 8.1% 13.4% 9.8% 10.2%
    Net profit 1,097 2,104 1,531 1,755
    (%) NPM) 4.5% 7.0% 5.2% 5.7%

    Over the last four quarters: Although the company has been able to improve its performance during the last four quarters, the duty cuts announced during the current fiscal have had little impact on the profitability, as product prices have far outpaced any duty curbs being implemented by the government.

    What to expect?
    At Rs 198, the stock is trading at a price to earnings multiple of 3.9 times annualized 2QFY05 earnings. We believe that the current spike in product prices is short term and is likely to slow down over the next one year. Having said that, strong demand from developing nations shall assure reasonably high refining margins, although the current levels seem unlikely to sustain. The most beneficial option for the company at the current juncture is the merger with parent BPCL, which could result in higher refining capacity on the books of the marketing major, while Kochi Refineries could ride on the marketing arm of BPCL.



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