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Kochi: Fruits of BPCLs company - Views on News from Equitymaster
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  • Dec 31, 2003

    Kochi: Fruits of BPCLs company

    BPCL subsidiary, Kochi Refineries, posted poor results in 2QFY04. The topline of the company grew by just over 3%, where as the bottomline of the company showed a dip of around 23% YoY. Lower production was largely the reason for the marginal increase in topline. The crude thruput remained on the lower side as compared to same quarter last year (1.87 m tonnes as compared to 1.93 m tonnes).

    (Rs m) 2QFY03 2QFY04 Change 6mFY03 6mFY04 Change
    Net sales 21,267 21,991 3.4% 43,767 44,662 2.0%
    Other income 53 207 290.6% 98 232 136.7%
    Expenditure 19,499 20,818 6.8% 40,699 40,618 -0.2%
    Operating Profits 1,768 1,173 -33.7% 3,068 4,044 31.8%
    Operating Profit Margins (%) 8.3% 5.3%   7.0% 9.1%  
    Interest 211 99 -53.1% 451 214 -52.5%
    Depreciation 301 294 -2.3% 576 587 1.9%
    Profit before tax 1,309 987 -24.6% 2,139 3,475 62.5%
    Tax 457 330 -27.8% 755 1,125 49.0%
    Net Profit 852 657 -22.9% 1,384 2,350 69.8%
    Net Profit Margins (%) 4.0% 3.0%   3.2% 5.3%  
    No. of shares issued 138.5 138.5   138.5 138.5  
    Diluted Earning per Share 24.6 19.0   20.0 33.9  
    P/E Ratio   9.6     5.4  

    The diesel consumption remained on the lower side in the second quarter mainly due to CNG conversion of diesel vehicles. The reason for 300 basis points dip in operating margins is due to increase in the raw material cost. The raw material cost as percentage of sales increased from 90% in 2QFY03 to 93% in 2QFY04. However, due to improved refining margins in the first quarter, the performance of the company on a half-yearly basis looks better.

    The company has plans to increase its refining capacity by 33% over next few years. The current capacity of the company stands at 7.5 m tonnes. This expansion plan will involve a capex of around Rs 20 bn. Kochi has plans to set up an import facility (for crude oil) with a capex of Rs 5 bn. This will help company to save Rs 1,600 m in freight expenses every year. The project is expected to be over by 2006.

    In order to reduce the cost of production and enhance competitiveness, the company had prepared a road map to modernise the refinery to meet fuel quality requirements by 2005. The company also has plans to comply with Euro III norms specified by the Government.

    Post the takeover by BPCL, the companys prospects have improved. From a standalone refinery status, the company has become part of a larger energy consortium. BPCLs refining and marketing strengths have buoyed the performance as well as the sentiment towards the company. Consequently, the company has had the courage to plan for expansion and modernisation.

    The stock has appreciated by over 300% since the start of the year. At the current price level of Rs 182, the stock trades at P/E multiple of 5.4x annualised 1HFY04 earnings. Though the valuation is on the lower end of the sector spectrum, investors must remember that Kochi Refineries is still a standalone refining company. Also, the strategy of BPCL towards the company is not very clear in terms of whether it plans to merge the company with itself. However, it is unlikely that BPCL would encourage Kochi Refineries to enter the marketing arena of the business. To that extent, Kochi will continue to remain a pure refining play. Apart from the above reasons, the company looks set to see decent growth over the next 3 years.



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