State-run oil firms win back investors

Strong rupee, better refining margins fuel profits to record highs.

The public sector oil refining and marketing companies "� Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) "� are back on the radar of investors as their profit levels reach record highs, boosted by an appreciating rupee, higher refining margins and lesser subsidy burden.

The profits of IOC and BPCL have already surpassed their all-time highs of 2003-04, when they reaped the benefits of deregulated pricing. The administered price mechanism (APM) ended in 2002 and oil companies were able to price their products in line with market rates.

IOC, which controls over 40 per cent of the automobile fuel retailing business in the country, recorded a net profit of Rs 7,499 crore in 2006-07, which is substantially higher than the net profit it managed in the last two years "� Rs 4,915.12 crore last year and Rs 4,891.38 crore for the year ended March 2005.

The profit in 2006-07 is even higher than the 2003-04 net profit of Rs 7,004.82 crore. These numbers are finding a reflection in the share prices of the companies.

"IOC, HPCL and BPCL are now long-term stocks and investors are taking long-term positions on them," a Mumbai-based analyst said. After a long gap, "the oil marketing companies are trading near their book values", he added.

HPCL has also recovered smartly in the last financial year with a net profit of Rs 1,571.17 crore, which is almost a four-fold increase over the Rs 405.63 crore recorded in 2005-06. The company, the second largest oil marketer in the country, had recorded a net profit of Rs 1,903.94 crore in 2003-04.

Kotak Securities has recommended a "buy" on the BPCL stock as it sees the losses that the company is making on the retail sale of petroleum products being offset by all-time high refining margins and a strong rupee.

"The situation on the marketing front is not as bad as it appears. Rupee appreciation has helped the oil marketing companies, which broadly means crude oil at $65 a barrel is essentially equivalent to $60 a barrel in rupee terms," a recent Kotak Securities report said.

BPCL recorded a net profit of Rs 1,805.5 crore for the financial year ended March 2007, which is sharply higher than Rs 129.8 crore it recorded in 2005-06 and Rs 965.8 crore in 2004-05. In 2003-04, the company had a net profit of Rs 1,694.6 crore.

"The last financial year of BPCL was primarily boosted by a higher subsidy contribution from upstream companies (Rs 4,460 crore) and oil bonds (Rs 5,250 crore) coupled with better refining margins," the Kotak report said.

In 2006-07, contribution from usptream companies such as ONGC and GAIL (India) and oil bonds made up for 92 per cent of BPCL's total under-recoveries. In 2005-06, they contributed just 75 per cent, with the remaining 25 per cent being borne by the company itself.

The IOC stock has appreciated 19.92 per cent to Rs 465.25 on June 1 from Rs 387.95 on April 2. The HPCL stock has risen 22.97 per cent to Rs 295.75 and the BPCL scrip 22.09 per cent to Rs 358.95 during the same period.