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Energy: Sector skids as crude surges

Nov 10, 2000

The scorecards of the big three oil companies for the second quarter of FY01 are out. With the continuing rise in oil prices the reports do not make a pretty picture. The oil companies have reported a significant growth in turnover due to the increase in petroleum product prices. The Government has increased prices twice since January '00. Consequently, realisations YoY have increased; resulting in strong growth rates.

  IOC BPCL HPCL
(Rs m) 2QFY00 2QFY01 2QFY00 2QFY01 2QFY00 2QFY01
Sales 221,470 300,796 76,001 108,968 75,898 117,062
Other Income 1,168 1,530 318 359 158 607
Expenditure 204,668 281,887 71,692 101,613 69,987 112,690
Operating Profit (EBDIT) 16,802 18,910 4,309 7,355 5,911 4,372
Operating Profit Margin (%) 7.6% 6.3% 5.7% 6.7% 7.8% 3.7%
Interest 2,596 4,113 415 699 246 1,030
Depreciation 4,102 5,520 1,404 1,697 2,409 1,064
Profit before Tax 11,272 10,807 2,808 5,318 3,414 2,885
Tax 1,394 1,027 740 1,729 921 660
Profit after Tax/(Loss) 9,878 9,780 2,068 3,589 2,493 2,225
Net profit margin (%) 4.5% 3.3% 2.7% 3.3% 3.3% 1.9%
No. of Shares (eoy) 389 779 150 150 226 339
Diluted Earnings per share* 50.7 50.2 55.1 95.7 29.4 26.3
P/E Ratio   2.4   1.8   3.9
(*annualised)            

Oil company woes that started in FY00 have continued in the current fiscal. In fact, the first half of FY01 has been even tougher with crude oil prices touching new ten year highs of $35/ barrel (Brent). This has put severe pressure on the refining margins of oil companies. Consequently, they all have reported a drop in OPM. The rise in OPM for Bharat Petroleum (BPCL) is due to extra-ordinary items. However, when adjusted for it shows only a marginal drop of 20 basis points.

The woes of the big three did not end there. They have the Oil Coordination Committee (OCC) to deal with, which fixes the import parity prices for petroleum products. The prices may not have been a true reflection of the prices in the international markets, adversely affecting the refining margins.

Further, with the oil pool account (OPA) in deficit the reimbursement of subsidy (on diesel, kerosene and LPG) did not come through. This disrupted their working capital cycle. Consequently, the companies had to resort to short term debt to overcome any shortfall in cashflows. This impacted their interest burden.

With the ensuing winter months in the northern hemisphere the demand for petroleum products is expected to remain strong. Consequently, prices are not expected to weaken till the end of 4QFY01. This will maintain the pressure on the refining margins of oil companies; affecting their bottomline.

Any further rally in oil prices will put pressure on the OPA, which will affect the working capital requirements of these companies resulting in higher interest costs. It will also put downward pressure on the existing refining margins.

The oil companies do not have much to cheer about, as the outlook for FY01 does not look very bright unless there are subsequent rounds of price increases. Consequently, we have downgraded the earnings outlook of oil companies in our research sections.


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