Nat West Securities Bpcl

Aromatics add dash to higher throughput and market share. BPCL has proved its operating mettle yet again. Its refinery throughput of 7.59m tonnes in FY97 was 3.3 per cent higher than the previous year's 7.35 tonnes. It also marginally improved its market share to 20.4 per cent from 20.3 per cent in FY96. Taking advantage of robust demand, it produced 1,02,000 tonnes of aromatics (which are deregulated and profitable), up from last year's 74,000 tonnes despite subdued international prices.

Triple bill: strong growth, low risk, attractive valuation: BPCL's attractiveness spans all three investment dimensions. We forecast its earnings to grow by 17.3 per cent pa until FY99. Our expectation of the markets' growth over the same period is 19 per cent. The sector is low-risk with assured demand and profitability. And for all this, the stock quotes at a premium of only 5 per cent based on FY98 earnings, much lower than the premium on other "safe" stocks.

 

Impressive operating performance in FY97 BPCL declared its unaudited YF97 results on May 29. The net profit was close to our estimate although the tax charge was much lower than what we had projected. Since the total capital expenditure of Rs 700 crore matched our estimate, the lower tax figure could have been due to a higher proportion of capital expenditure being incurred in the first of FY97 than we had expected.

We estimate that the declared profit would have earned the company an ROE of 22 per cent in line with its own past ROEs of 23-24 per cent, and much higher than the 12 per cent assured by the administered pricing mechanism (APM). This is on account of the company's earnings from aromatics - which are free priced - of which BPCL increased its production from 73,000 tonnes in FY96 to 1,02,000 tons in FY97. A lower-than-normative tax rate has also helped the company show a higher ROE.

The refinery throughout of 7.53m tonnes exceeded the standard of 6.75m tonnes fixed for BPCL under the APM. This open up the possibility of the standard being revised upwards in the next price revision leading to a possible negative impact. However, there are no firm indications yet from the Oil Co-ordination Committee (OCC) about such a move. BPCL marginally increase its market share to 20.4 per cent during FY97 from 20.3 per cent in FY96.

Mounting oil pool dues force IPO deferment, but projects are on in full swing. BPCL's dues from the oil pool have reached a high of Rs1300 crore forcing the company to defer its domestic IPO (15m shares). Leveraging its low-risk perception, the company has borrowed from the domestic debt market to fund its working capital, and has managed to keep its capital expenditure programme progressing. We estimate that its debt/equity ratio at the end of FY97 was a mere 11 per cent, giving us confidence that it can continue to fund its projects during FY98 even if the release of its dues from the oil pool is delayed.

The next major project to be commissioned is the Mumbai-Manmad pipeline work on which is proceeding to schedule. The pipeline is due to be commissioned in April 1998. BPCL's other projects are also advancing on time (diesel desulphurisation, terminal for Bin refinery and other smaller refining and marketing projects).