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KRL: BPCL effect

Nov 29, 2001

Kochi Refineries Ltd. (KRL) was acquired by Bharat Petroleum Corp. Ltd. (BPCL) at the end of FY01 for Rs 6.5 bn. The Government undertook re-structuring in the industry, as the belief was that stand-alone refineries were unlikely to withstand volatility in oil prices and deregulated market environment.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Net sales 19,663 17,803 -9.5% 35,376 28,118 -20.5%
Other Income 291 85 -71.0% 481 155 -67.9%
Expenditure 19,002 17,131 -9.8% 34,322 26,710 -22.2%
Operating Profit (EBDIT) 661 672 1.7% 1,053 1,408 33.7%
Operating Profit Margin (%) 3.4% 3.8%   3.0% 5.0%  
Interest 298 326 9.3% 545 604 10.8%
Depreciation 245 285 16.4% 492 542 10.2%
Profit before Tax 410 146 -64.3% 497 416 -16.3%
Tax 119 67 -43.8% 211 153 -27.4%
Profit after Tax/(Loss) 290 79 -72.7% 286 263 -8.1%
Net profit margin (%) 1.5% 0.4%   0.8% 0.9%  
No. of Shares 68.9 138.5   68.9 138.5  
Diluted earnings per share* 8.4 2.3   4.1 3.8  
P/E Ratio   14.9     9.0  

The decline in sales for 2QFY02 has been more or less in line with the industry. However, topline performance for half year ended September '01 has been largely affected by the poor show in 1QFY02 during which period sales dipped by 34.4% YoY. The decline in sales is likely due to both drop in product offtake and prices. Crude throughput of the company for 1HFY02 was lower by 19.3% YoY to 3.2 m metric tonnes (MMT). This is likely to have resulted from the planned maintenance shut down at the plant for 53 days.

Surprisingly, and beating industry trend, the company has reported an improvement in operating margins. Operating costs of KRL have dipped at a faster clip compared to sales, thereby protecting margins. While throughput for the quarter and half year ended September '01 has declined, raw material expenses have fallen by an even larger percentage, which could indicate softening in crude procurement prices YoY. The decline in operating expenses was led by lower raw material costs, which accounted for as high as 98% of operating expenses in 1HFY02. The higher margins have led to an increase in operating profits.

The drop in pre-tax profits is sharper due to the lower other income over both the periods. Adjusting for the same pre-tax profits would have improved significantly in 1HFY02, which indicates improvement in earnings from core activity. Tax provision for both the years is inclusive of deferred taxes. Cumulative deferred taxes upto March '01 have been adjusted against reserves in FY01.

At Rs 34 the scrip is trading on a multiple of 9x 1HFY02. This is significantly higher than its peer group. Since beginning of October '01, oil prices have been weakening and touched their two-year lows of $17 / barrel. This will ease the pressure on refining margins, which is beneficial for the company.

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