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BPCL: Excerpts from a research meet - Views on News from Equitymaster
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BPCL: Excerpts from a research meet
Dec 7, 2004

Following are the excerpts from our research meet with Bharat Petroleum Corporation (BPCL), the country’s second largest oil marketing company in terms of market share. The focus of the meet was to understand the impact of changing government policies, highly volatile crude prices and intensifying competition on the marketing side from new players on the petroleum sector in general and BPCL in particular.

Company background:
BPCL is the country’s second largest oil marketing company in terms of market share. The company accounts for nearly 25% of the petroleum products sale in the country and has been aggressively vying for mare stake. It has over 5,000 retail outlets and plans to set up another 700 retail outlets in the current year. In order to reduce its dependence on external refineries for products, BPCL is expanding its Mumbai refinery capacity to 12 MMTPA and is also working on merging Kochi Refineries, its subsidiary.

Key Impressions:
  • Industrial outlook:  Currently, the sector is growing at a rapid pace on the back of robust economic activity. The petroleum sector has grown by nearly 6% in the 1HFY05 and the year is likely to witness over 5% growth on a cumulative basis. In a growing economy like India, on a conservative basis, if the GDP is expected to grow at over 6.5%, the petroleum sector is likely to grow by over 5%.

  • Refinery plans:  BPCL is currently increasing the Mumbai refinery capacity to 12 MMTPA from the current 8.7 MMTPA. The company is setting up a hydro cracker unit (HCU), which would increase the contribution of higher value yielding products (petrol and LPG). Currently, the company processes crude oil in the mix of 35:65, whereby the larger chunk is light crude. Once the HCU is in place, this mix is likely to improve to 50:50, which would mean that sour crude content is likely to rise. Since sour crude is cheaper by nearly US$ 2 per barrel, the company is likely to witness savings on the cost front.

  • Marketing strategy:  BPCL is planning to set up nearly 700 retail outlets in the current fiscal. Although the growth in the retail outlets far outpaces the growth in product sales, in order to maintain its current throughput per outlet (sales per outlet) of over 200 kilo liters, the company would relocate or shut existing outlets that are unviable. Further, branding is of prime focus as unlike earlier days, the company has now witnessed that the consumers have shifted to a certain brand and BPCL therefore, plans to increase its branded fuels outlets, where it enjoys nearly 50% market share.

  • Government policies:  Although the current government has increased product prices (mainly LPG by Rs 40 per cylinder), the resultant under-recoveries per cylinder have increased. This is because, in the international markets, LPG prices have touched US$ 480 per tonne as against US$ 300 per tonne, which is considered to be the long term average. To put things in perspective, the oil marketing companies currently witness a loss of nearly Rs 130 per cylinder on account of high product prices (despite price hikes and duty cuts). This is due to the fact that the government has reduced its share of subsidies from Rs 45 per cylinder in FY04 to Rs 23 per cylinder in the current fiscal and this is likely to be nil next year onwards. However, the fact that the government has not given in to pressure from its allies and has increased product prices on three counts due to prevalent economic conditions, credit should be given for the same.

  • Gas business:  Natural gas is likely to be the future of the energy sector and is fast growing in the country. Knowing that CNG is fast eating into the diesel and petrol market, BPCL plans to aggressively enter into 5 cities in Gujarat with CNG stations so as not to lose out its existing customers.

What to expect?
At Rs 435, the stock is currently trading at a price to cash flow multiple of 5.1 times FY05E earnings (price to earnings multiple of 7 times our FY05 estimated earnings). Given the capacity expansion plans at the current manufacturing facility in Mumbai and the merger of Kochi Refineries, the dependence on other refineries for petroleum products will reduce. We believe that this move will result in significant one-time cost savings for the company.

Having said that, increasing competition in the marketing side would result in lower sales per outlets and therefore, lower returns on investment. The interference of the government in pricing will continue to impact valuations of PSU stocks. More importantly, given the capacity expansion plans of the refinery sector, if demand fails to catch up, the current oversupply situation could worsen. This could mean existing players exporting the surplus, which commands lower margins. Overall, risk-reward equation is equally poised.

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Feb 23, 2018 (Close)