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BPCL: Problems galore! - Views on News from Equitymaster
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BPCL: Problems galore!
Nov 2, 2005

Performance Summary
BPCL, the oil refining and marketing player, announced its 2QFY06 results last week. As expected, the sharp rise in crude prices and the absence of commensurate increase in product prices has pushed the company into net loss in 2QFY06 as well as for the first half. The highlights of the quarter and the half year were slower growth in petroleum products demand and unfavourable government pricing policy.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 133,741 162,078 21.2% 264,349 322,234 21.9%
Expenditure 129,035 163,668 26.8% 256,178 327,030 27.7%
Operating profit (EBDITA) 4,706 (1,590)   8,171 (4,796)  
EBDITA margin (%) 3.5% -1.0%   3.1% -1.5%  
Other income 2,007 1,458 -27.4% 2,555 2,284 -10.6%
Interest 377 378 0.3% 604 781 29.3%
Depreciation 1,625 1,483 -8.7% 3,161 3,007 -4.9%
Profit before tax 4,711 (1,993)   6,961 (6,300)  
Extraordinary items - -   - -  
Tax 1,497 37 -97.5% 2,274 44 -98.1%
Profit after tax/(loss) 3,214 (2,030)   4,687 (6,344)  
Net profit margin (%) 2.4% -1.3%   1.8% -2.0%  
No. of shares (m) 300.0 300.0   300.0 300.0  
Diluted earnings per share (Rs)* 42.9 (27.1)   31.2 (42.3)  

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 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 awaiting court approval for the merger of its subsidiary Kochi Refineries with itself.

What influenced performance in 2QFY06?
Market sales stagnant: In 1HFY06, market sales were marginally lower at 4.85 MT (down 1% YoY), primarily led by lower diesel sales (down 11%). Though demand for aviation fuel (13% YoY), lubricants (7% YoY), naphtha (19% YoY) and natural gas (98% YoY) grew at a healthy pace, considering the large contribution from diesel sales, the overall volumes were lower in 1HFY06. Though very insignificant to BPCL's overall volumes, exports grew at a faster rate of 15% and 44% YoY in 2QFY06 and 1HFY06 respectively. We believe that the outlook for the current fiscal year, on a overall basis, remains weak.

Margins tumble: The decline in operating margin has to be viewed in the context of absence of any increase in petroleum products by the government. Even as there was a price increase, it did not make any good for oil marketing companies, except for the fact that BPCL's operating margins are better than the previous quarter. Gross refining margins tumbled during the quarter, on a YoY basis, as is evident from the graph. The reason for the decline could be attributed to softening of prices globally in the last six months. The magnitude of the decline has been significant.

No pass-through…
(% sales) 2QFY05 2QFY06 1HFY05 1HFY06
Consumption of raw materials 19.3% 14.8% 19.8% 20.3%
Purchases 70.9% 78.0% 70.2% 89.5%
Staff cost 1.2% 1.0% 1.5% 1.3%
Other expenditure 5.1% 7.1% 5.4% 8.2%

All fall down: A loss at the operating level combined with a sharp fall in other income, led to BPCL posting a net loss as compared to net profit in the same quarter previous fiscal year. Given the uncertainty with respect to government policies, we foresee a need to downgrade our earnings projections for FY06. The recent rupee depreciation is likely to have a negative impact, as crude prices will become even more dearer.

What to expect?
With the company in losses, valuation multiples are no longer relevant from the near-term standpoint. However, we believe that the company's strong distribution reach, which is likely to take a long-time for private players to replicate, and strong refining capabilities are big positives. We believe that the refining and marketing assets of the company are worth significantly higher than the current market price. However, we would like to remind investors that investing on the basis of this is a high risk strategy.

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Feb 22, 2018 03:37 PM