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Bongaigaon Refineries: Scripting a new story…

Nov 11, 2004

Introduction to results
Bongaigaon Refineries, the standalone-refining subsidiary of IOC, posted robust 2QFY05 earnings with the topline witnessing a jump of 54% YoY while the bottomline surged by over 53% YoY. At the same time, operating profits have shown an impressive growth of nearly 55% YoY.

What is the company’s business?
BRPL is a stand-alone refinery of IOC in the North East and caters to the parent’s marketing requirements in the region. The company has a refining capacity of 2.35 MMTPA (million tonnes per annum) and has an integrated petrochemicals complex, which helps produce value added products. BRPL recently entered into an alliance with Reliance Industries in the petrochemicals business.

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net sales 7,563 11,658 54.1% 13,697 21,478 56.8%
Expenditure 6,027 9,282 54.0% 10,895 17,130 57.2%
Operating profit (EBDITA) 1,537 2,376 54.7% 2,801 4,348 55.2%
EBDITA margin (%)20.3%20.4% 20.5%20.2% 
Other income 47 55 17.9% 90 105 16.9%
Interest 34 5 -86.3% 86 20 -77.4%
Depreciation 76 99 31.7% 151 181 19.9%
Profit before tax 1,474 2,328 57.9% 2,655 4,253 60.2%
Tax 424 719 69.8% 745 1,322 77.4%
Profit after tax/(loss) 1,050 1,609 53.2% 1,910 2,931 53.5%
Net profit margin (%)13.9%13.8% 13.9%13.6% 
No. of shares (m) 199.8 199.8   199.8 199.8  
Diluted earnings per share (Rs)* 21.0 32.2   19.1 29.3  
Price to earnings ratio (x)   3.1    3.4  
(* annualised)      

What has driven performance in 1QFY05?
Import parity boom:  Post APM dismantling, Indian refineries have been able to improve realizations as the value is linked to international product prices. The current uptrend in petroleum product prices have helped revenues surge as is evident from the high gross refining margins being enjoyed by the company. To put things in perspective, GRMs improved by more than double to US$ 9.3 per barrel during 2QFY05 as compared to US$ 4.3 per barrel in 2QFY04. Further, demand for petro-products also increased during the period (5.6% YoY). Higher volumes further boosted realizations for BRPL. The company has also benefited from the current uptrend in the petrochemicals business with the assistance of Reliance Industries.

Expenditure Table
(%) of sales2QFY042QFY051HFY04 1HFY05
Raw materials consumption72.5%72.2%72.8%71.7%
Staff cost3.2%1.8%3.0%1.9%
Other expenditure3.9%5.6%3.7%6.1%

Operating margins:  Operating margins growth for the quarter remained flat on a year on year basis on the back of rising other expenditure. However, the company was able to reduce its staff costs significantly. Although raw material prices (read crude oil) increased during the quarter, inventory gains helped the company sustain margins. Also better capacity utilization of over 102% during the quarter as against 88% in 2QFY04 on the back of rising product prices helped matters.

It all trickles down to the bottomline:  High product prices coupled with efficient cost control led to an over 53% surge in the bottomline during 2QFY05. Further, a sharp dip of over 86% in interest obligations aided the bottomline growth of the company.

Segmentation Table
Segmental EBIT (%)2QFY042QFY051HFY041HFY05

Segmental break-up:  A look at the segmental EBIT contributions shows that while the refining performance has been robust for BRPL, its petrochemicals unit has also witnessed a revival after the alliance with Reliance Industries and the current uptrend in the petrochemicals prices. The high refining margins of US$ 9.3 per barrel are also owing to its integrated petrochemicals complex, which has resulted in higher value added products being produced at the refinery gate, thereby boosting realizations and providing a fillip to profits.

What to expect?
At Rs 99, the stock is trading at a price to earnings multiple of 3.1 times annualized 2QFY05 earnings. Bongaigaon Refineries and Petrochemicals (BRPL) has witnessed robust growth during the last few quarters and this is likely to continue in the current fiscal on the back of sustained firm international product prices. The company has declared an interim dividend of Rs 6 per share during the quarter, which amounts to over 6% of dividend yield. At the current juncture, high realizations and profitability seems to be factored in and we would advise investors to exercise caution.

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