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IBP: A lone ranger… - Views on News from Equitymaster
 
 
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  • Nov 29, 2004

    IBP: A lone ranger…

    Performance summary
    IBP, a standalone marketing subsidiary of the energy sector’s largest downstream player IOC, posted poor 2QFY05 results. Although the topline improved by an impressive 31% YoY, the bottomline actually slipped in the negative with a margin of –2%. The company continues to take a hit from both sides i.e. prices of petro-products have increased at the sourcing level while prices have not increased proportionately at the sales side.

    What is the company’s business?
    IBP is a stand-alone marketing subsidiary of IOC with a strong presence in the northern rural markets. The company owns over 2,000 retail outlets and utilizes parent, IOC’s infrastructure for refined products and storage. Having said that, it has a strong brand loyalty in the lubes segment and is soon to be merged with IOC, which would result in a combined retail strength of over 10,500 retail outlets between the two companies. The company also has other minor business operations, which are industrial explosives and cryogenics.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 23,280 30,544 31.2% 48,356 63,421 31.2%
    Expenditure 22,502 31,189 38.6% 47,098 64,199 36.3%
    Operating profit (EBDITA) 778 (645) -182.8% 1,258 (778) -161.8%
    EBDITA margin (%) 3.3% -2.1%   2.6% -1.2%  
    Other income 118 164 39.8% 222 325 46.3%
    Interest 0 - -100.0% 1 - -100.0%
    Depreciation 110 129 16.5% 203 243 19.7%
    Profit before tax 785 (609) -177.5% 1,277 (695) -154.5%
    Tax 282 -   458 -  
    Profit after tax/(loss) 503 (609) -221.0% 819 (695) -184.9%
    Net profit margin (%) 2.2% -2.0%   1.7% -1.1%  
    No. of shares (m) 22.2 22.2   22.2 22.2  
    Diluted earnings per share (Rs)* 90.9 (110.0)   73.9 (62.8)  
    Price to earnings ratio (x)   (4.9)     (8.7)  
    (* annualised)            

    What has driven performance in 2QFY05?
    Import parity boom:  During 1HFY05, petroleum products demand in the country was higher by nearly 6% YoY as against a flattish trend in the previous few years. IBP, with its strong presence in the northern region, which usually witnesses high demand as compared to other parts, has been able to benefit from the same. Higher product sales usually result in a boon for the company. However, in case of IBP, it has proved to be a bane, what with the government applying a freeze on product prices, therefore pushing IBP into losses.

    Expenditure
    (%) of sales 2QFY04 2QFY05 1HFY04 1HFY05
    Consumption of raw materials 93.7% 99.7% 94.6% 99.0%
    Staff cost 1.1% 0.9% 1.1% 0.9%
    Other expenditure 1.8% 1.5% 1.7% 1.4%

    Hit on both sides:  IBP witnessed negative operating margin of over 2% YoY during 2QFY05 on the back of rising input costs and freeze on product selling prices. To put things in perspective, petrol and diesel prices crossed US$ 50 per barrel mark during 2QFY05 in the international markets, resulting in higher purchase costs. On the other hand, political considerations resulted in economics taking a backseat.

    It all trickles down to the bottomline:  Higher operating costs resulted in the bottomline degrowth of 221% during the quarter with the met profit margin being a negative 2%. But for the 40% improvement in other income, the figures would have posted a much negative picture.

    Quarterly performance
    Quarterly trend 3QFY04 4QFY04 1QFY05 2QFY05
    Sales 30,200 29,828 32,877 30,544
    (%) QoQ growth -1.2% 10.2% -7.1%
    Op. profit 7,445 1,381 (133) (645)
    (%) OPM -81.5% -109.6% 384.7%
    Net profit 3,871 935 (86) (609)
    (%) NPM -75.8% -109.2% 608.0%

    Quarterly sigh:  The last four quarters’ performance gives an indication of the impact that the government policies have had on IBP’s performance. Post 3QFY04, IBP’s performance has declined QoQ and has worsened during the current fiscal, having posted a net loss of Rs 695 m during the 1HFY05. If the current trend of high input costs continues without adequate price increases at the retail level, IBP will continue to bleed.

    What to expect?
    IBP is a standalone marketing player and the company is soon to be merged with IOC. Given the business profile of the company, IBP fares very poorly against its relatively integrated peers such as BPCL and HPCL. However, given the combined strength with IOC, IBP is well placed to take on the new competition posed by the private players. At the same time, IOC can ride on IBP’s strength in the northern regions and its presence in the high potential rural markets.

     

     

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