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BPCL: Profit slumps 50%
Nov 26, 2014

Bharat Petroleum Corporation Ltd (BPCL) has announced results for the quarter ended September 2014. The company has reported flattish sales growth of 0.4% YoY for the quarter while net profits declined 50% YoY. Here is our analysis of the results

Performance summary
  • Revenue growth remains flattish at 0.4% YoY.
  • The operating profit for the quarter declined 34.6% YoY, with margins at 1.8% versus 2.8% in 2QFY14.
  • The net profit for the quarter declined 50.1% YoY with net profit margins at 0.7% versus 1.5% in 2QFY14.
  • The crude throughput for the quarter stood at 6.09 million tonnes (MT), up from 5.34 MMT in 1QFY14, up 0.8% YoY.
  • The market sales (including exports) for the quarter stood at 8.77 MT, down 1% YoY (down 7% QoQ).
  • For 2QFY15, the GRMs (gross refining margins) stood at US$ 1.5 per barrel, down from US$ 4.7 per barrel in 2QFY14. As such, the company had to bear nil under recovery burden for the quarter.

(Rs m) 2QFY14 2QFY15 Change  1HFY14 1HFY15 Change 
Net sales 617,574 619,785 0.4% 1,204,627 1,287,282 6.9%
Other operating income 271 467 71.9% 583 872 49.6%
Total income 617,845 620,252 0.4% 1,205,210 1,288,154 6.9%
Expenditure 600,768 609,076   1,178,767 1,261,777  
Operating profit (EBDITA) 17,077 11,176 -34.6% 26,443 26,377 -0.2%
EBDITA margin (%) 2.8% 1.8%   2.2% 2.0%  
Other income 4,568 2,551 -44.2% 7,951 12,784 60.8%
Interest 3,244 1,292 -60.2% 8,497 3,240 -61.9%
Depreciation 5,382 6,333 17.7% 10,687 11,905 11.4%
Profit before tax 13,020 6,102 -53.1% 15,210 24,016 57.9%
Profit before tax margin (%) 2.1% 1.0%   1.3% 1.9%  
Tax  3,708 1,460 -60.6% 4,396 7,211 64.0%
Profit after tax/(loss) 9,311 4,642 -50.1% 10,814 16,805 55.4%
Net profit margin (%) 1.5% 0.7%   0.9% 1.3%  
No. of shares (m)       723    
Diluted earnings per share (Rs)*       64.4    
P/E ratio(x)*       11.2    
*On a trailing 12 months basis

What has driven performance during the quarter?
  • BPCL reported flattish growth in revenues and sales volumes declined by 1% YoY for the quarter.

  • Lower gross refining margins (due to weak global margins) and inventory losses (falling crude prices) led to the decline in operating margins and operating profits declined by 34.6% YoY.

  • The net profits for the quarter declined by 50% YoY. The company did not have to bear any under recovery burden during the quarter. Further, there was a sharp decline in the interest costs. Falling crude prices and diesel decontrol lowered the interest costs. However, other income declined by 44% YoY for the quarter.

    Cost breakup
    (Rs m) 2QFY14 2QFY15 Change
    Raw material cost 562,165 574,514 2.2%
    as a % of sales 91.0% 92.7%  
    Staff cost 6,681 5,783 -13.4%
    as a % of sales 1.1% 0.9%  
    Other expenses 31,922 28,779 -9.8%
    as a % of sales 5.2% 4.6%  
    Total costs 600,768 609,076 1.4%
    as a % of sales 97.3% 98.3%  
What to expect?
As crude prices have softened and diesel has been deregulated, a decline in under recoveries will lead to better working capital management and lower interest costs. The results for this quarter are not comparable on a YoY basis because of the nil under recovery burden and inventory loss this quarter. The company had to bear a forex and inventory loss of Rs 3 bn and Rs 2.7 bn respectively this quarter. The management has given a capex guidance of Rs 85 bn and Rs 95 bn in FY 15 and FY16 respectively, of which Rs 14 -Rs 15 bn will be spent on upstream assets. Bina refinery for the half year has incurred losses worth Rs 6.5 bn while net profit for Numaligarh refinery stood at Rs 1.8 bn.

The company is planning to invest further in upstream segment and is planning expansion at Kochi refinery. Diesel deregulation will help in better working capital management and lower under recovery costs for the company. However, the move is likely to attract competition from Private players. Still, BPCL is better placed than its peers because of its exposure to E&P (Exploration and Production) segment. The stock price for BPCL has seen a significant run up of around 103% in the year till date. We believe investors should avoid buying the stock at current prices as current valuations already capture the positives and leave limited upside potential.

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