Refining & marketing (R&M) companies have shown dramatic improvement in financial performance after experiencing a challenging fiscal last year. Dismantling of the administered pricing mechanism (APM) from April 1, 2002 has yielded significant gains for the industry. While having made a cautious start to free pricing, marketing companies revised petrol & diesel prices over the past five consecutive fortnights ending October 15, 2002.
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Turnover and post tax profits of BPCL fell by 8% and 49% respectively in 2QFY02, which has facilitated, to an extent, the YoY improvement in financial performance for quarter ended September '02. Compared to a 1.2% drop in product sales, 2QFY03 sale volumes have increased by 5.2% YoY. Having said that, the rise in volumes is primarily due to exports while domestic sales have risen marginally in the concerned quarter. In fact, domestic sales for half-year ended September '02 are lower by 1.7% YoY.
Aggregate volumes growth seems to be driven by light distillates, petrol and LPG. Upturn in the automobile industry, we reckon, is likely to have triggered higher consumption of petrol and diesel. Focused efforts by industry has led to LPG replacing kerosene, as domestic fuel of choice. LPG has been registering double digit growth over the past three years. Industry has introduced a 5 kg LPG cylinder to penetrate the rural market. The lubricants business, which is dependent on the automobile sector and contributes a larger share to operating profits, has registered an impressive 19% YoY growth in 1HFY03. We reckon, depressed airline industry, shift in domestic fuel preference and sluggish industrial growth is likely to have affected offtake of ATF, kerosene and heavy distillates respectively, which is likely to have affected domestic volumes. With improving marketing margins, volumes have been driven by products purchased for re-sale, which have increased 12.2% YoY in 2QFY03.
Blended realisations have incresed by an estimated 3.3% YoY in 2QFY03, which are likely to have been pulled down by ATF and heavy distillate prices due to considerable weakening in the global economy. Petrol and diesel prices rose by an estimated Rs 1.3/ litre and Rs 1.9/ litre during the quarter. We reckon, revision in the vehicular fuel prices is likely to have grossed BPCL an incremental Rs 4.2 bn for the concerned period. That said, raw material cost has spiraled, especially considering the 1.3% YoY decline in throughput, by 35% in 2QFY03. International crude oil prices (Brent blend), although rising over 2002, are higher by an average 6.1% over the same period last year. Considering the weak global economy and firm feedstock prices, we reckon, refining margins continue to remain thin while marketing margins are likely to have improved. Operating margins have been supported by inventory gains and provisions for reimbursement of subsidy against LPG and kerosene. In 2QFY03, BPCL has written off bad debts of Rs 834 m towards supply of naphtha to Nocil.
Interest expense has been declining over the past two quarters. The company could have taken advantage of softer interest rates by refinancing debt. Also, as mentioned in our 1QFY03 report, the company has received funds from the Government in lieu of LPG and kerosene subsidy. On pro-rata basis, estimated amount of funds received for first five months of FY03 was Rs 3.8 bn. Reimbursement of subsidy will have improved cash flows reducing working capital requirements. Depreciation charges, similar to 1QFY03, are higher due to increase in procurement of LPG cylinders. To put in perspective the rise in procurement, cylinder depreciation rate has been reduced from 100% to 80% from FY03.
At the end of first quarter, the BPCL scrip was quoting at Rs 297 on a multiple of 9.1x 1QFY03 annualised earnings. Currently, the scrip quotes at Rs 185 and is trading on a multiple of 4.9x 1HFY03 annualised earnings. Prior to build up of disinvestment expectations, BPCL historically traded in a band of 3x-6x earnings. We do not expect a sharp fall in international crude and petro prices therefore inventory gains are likely to accrue for rest of the year. Also, steady reimbursement of subsidy will support margins.
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