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BPCL: Price deregulation holds the key - Views on News from Equitymaster

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BPCL: Price deregulation holds the key

Nov 3, 2009

Performance summary
  • Topline declines by 28% YoY during 2QFY10 due to lower realisations.
  • EBITDA margins improve from a -5.7% in 2QFY09 to -0.4% in 2QFY10 due to lower under recoveries on petroleum products.
  • Other income grows by 41% YoY during the fiscal.
  • Interest cost declines by 50% during 2QFY10.
  • Bottomline remains in the red of despite the improvement in operating margins and higher other income.

Standalone Financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 378,507 270,923 -28.4% 768,982 526,067 -31.6%
Expenditure 399,936 271,873 -32.0% 797,850 519,347 -34.9%
Operating profit (EBDITA) (21,429) (950)   (28,868) 6,720  
EBDITA margin (%) -5.7% -0.4%   -3.8% 1.3%  
Other income 2,980 4,211 41.3% 5,483 11,023 101.1%
Interest 5,338 2,673 -49.9% 8,354 5,538 -33.7%
Depreciation 2,419 3,088 27.6% 5,110 5,399 5.7%
Profit before tax (26,207) (2,500)   (36,849) 6,806  
Tax 46 (912)   70 2,253  
Profit after tax/(loss) (26,253) (1,588)   (36,920) 4,553  
Net profit margin (%) -6.9% -0.6%   -4.8% 0.9%  
No. of shares (m)         362  
Diluted earnings per share (Rs)*         135  
Price to earnings ratio (x)*         4  
*On a trailing 12 months basis

What has driven performance in 1HFY10?
  • The gross refining margin for BPCL during 1HFY10 was US$ 2.14 per barrel (US$ 5.3 per barrel in 1HFY09) for its Mumbai refinery and US$ 6.25 per barrel (US$ 11.77 per barrel in 1HFY09) for its Kochi Refinery.

  • On the volumes front, the installed capacity of Kochi Refinery has been enhanced by 2 m tonnes to 9.5 m tonnes per annum in 2QFY10.The market sales for BPCL during 1HFY10 were higher at 13.45 m tonnes (MMT) from 13.23 MMT during 1HFY09. The company registered an increase in the volume of petrol (9.6%), LPG (4.7%) and diesel (4.3%). It was offset by a reduction in the volume of jet fuel (-18.6%) and furnace oil (-7.8%).

  • BPCLs under recovery on sensitive petroleum products was partially compensated by the upstream oil companies during the period. Accordingly, a discount of Rs 10.4 bn (Rs 60.8 bn during 1HFY09) was received for the purchase of crude oil and LPG from ONGC and GAIL.

  • BPCLs raw materials cost (as a % of sales) declined by 7.5% on a YoY basis from 99.1% in 2QFY09 to 91.7% during 2QFY10.

    Cost break-up
    (Rs m) 2QFY09 2QFY10 Change
    Raw materials 375,287 248,321 -33.8%
    % sales 99.1% 91.7%  
    Staff cost 3,115 5,534 77.7%
    % sales 0.8% 2.0%  
    Other expenditure 21,534 18,018 -16.3%
    % sales 5.7% 6.7%  
    Total cost 399,936 271,873 -32.0%
    % sales 105.7% 100.4%  

  • Other Income for 1HFY10 includes Rs 2.3 bn towards gains on foreign exchange fluctuations (foreign exchange losses during 1HFY09 of Rs 11.4 bn were accounted as other expenditure).

What to expect?
At the current price of Rs 509, the stock trades at a multiple of 11 times our expected FY12 consolidated earnings. We continue to advise caution on the stock as interest costs and regulatory concerns will continue to impact the short-term performance of the company, while poor return on incremental capital expenditure will impact the long-term performance of the company. Moreover, given their aam aadmi mandate, the government seems unlikely to bite the bullet when it comes to genuine deregulation of fuel prices.

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