Sarthak Behuria, CMD, BPCL, talks about the impact of rising crude prices and a host of other issues.
Bharat Petroleum Corporation Limited (BPCL) seems to be the savviest oil marketing company in the country. Despite being a public sector company, BPCL has been known for its nimble-footed and proactive approach. In the last one month, however, the company's shares have underperformed that of its rival Hindustan Petroleum, as the government announced plans to go in for an international public offer instead of a strategic stake sale in the company.
Even as analysts keep faith in the stock, thanks to the management's proven track record, the favourable business environment post dismantling of administered pricing and sound financials, there are some concerns on account of rising oil prices. Analysts suspect that the recent round of hikes in product prices will not be enough to compensate for the rise in crude prices and, hence, there will be an adverse impact on the bottomline.
Sarthak Behuria, chairman & managing director, spoke about the impact of rising oil prices and many more issues.
How have the first nine months of the current year been for the company and what are the prospects?
After deregulation of the sector, BPCL has shown an overall improvement on all fronts. Despite a planned shutdown, refinery crude throughput has reduced only marginally to 6.47 million metric tonne (MMT) as compared to 6.69 MMT last year. Market sales have increased to 14.71 MMT from 14.24 MMT in the last year. We have also increased our market share marginally.
Does the rise in oil prices worry you given that you do not have complete pricing freedom? What impact do you see on profit margins?
As you know, the refineries are being paid based on an agreed import parity formula. As such their margins are affected by relative changes in crude oil and product prices. So far as the trend is similar, refining margins would be maintained. In case of steep increases in prices, which are not expected to remain for a long period, there would be a need to protect consumers from the ill effects of such increases.
So there would always be a need to monitor the prices and decide on a variable margin depending upon the international market. Oil marketing companies can resort to higher margins during falling prices and vice versa.
As of now, the margins of non-subsidised products have shown an improvement compared to what they were when the prices were administered. If prices remain at the current levels, there would be no major impact on marketing companies. However, in case prices go up abnormally, the situation needs to be seen at that point of time.
Do you see the demand for oil being affected by the increase in crude prices?
Petroleum demand is quite inelastic in a narrow band. It is not affected by small price changes as the energy consumption pattern is committed. In fact during the current year, oil companies have witnessed a growth in demand despite increasing prices. However, very steep increases, say by 25 per cent or more, would make alternative energy sources more attractive. One can see this from the electricity companies, which shift the generation to the most attractive source -- hydro, coal or petro products.
Businesses also try to reduce energy consumption. Thus, in case there is a substantial increase in prices, which stays for a long period, it would affect oil demand.
What was your refining margin during the last quarter? What about marketing margins?
The refining margin for the last quarter was about US $ 3.1 per barrel. We have witnessed an increase in marketing margins of petrol and diesel after deregulation and we expect that the annual average would show an increase of 50 per cent to 100 per cent over administered pricing mechanism levels. BPCL's actual margin for motor spirit was around Rs 1,000 per kl and for high speed diesel it was Rs 800 per kl.
How much will the recent round of petrol price hikes add to your bottomline?
The increase in international prices gives oil companies trading gains on products purchased in one period and sold in another. The impact is reversed in case international prices drop. The recent increase in prices has been mainly in the second fortnight of December and hence, it would affect January prices. So this won't impact third quarter results.
As regards fourth quarter results, the impact depends on the sustainability of these prices. In case prices revert by March, there would be no impact. But on an overall basis, every US $ 1 change in crude prices would impact BPCL's profits by about Rs 80 crore on either side.
What is the status of the Bina refinery project? Has the delay in setting it up affected its viability?
Recently the Supreme Court has allowed BORL (Bharat Oman Refinery Ltd) to put up a pipeline in the Gujarat coastal area from the SBM location to land point. BORL is going ahead with this investment immediately, which would require approximately Rs 200 crore. The revised cost of the project is Rs 6,354 crore and it is approved by the government.
BPCL has applied for an increase in equity participation in BORL, but government clearance for the same is still pending. The project can kick off only once this approval is received. The project would be completed in 42 months from zero date.
It is a viable project and has a locational advantage as BORL would not have any other refinery within a 500 kilometre perimeter. The demand for petro products is increasing and it is expected to take care of the BORL production. As the project is coming up at a time when there is the likelihood of an increase in demand, its viability is not affected.
What is your capex outlay for the next two years and how do you plan to fund it?
As per our tenth five-year plan, the capex requirement is about Rs 7,500 crore. The planned capex is Rs 4,000 crore, including investments in joint venture companies of Rs 1,630 crore and a refinery modernisation project of Rs 1,831 crore.
Non-plan capex is projected at Rs 3,500 crore. This will be funded by our internal resources of Rs 7,100 crore. The rest will be supplemented by borrowings or a public offer.
Has the delay in divestment affected your plans in any manner?
The company has been growing and is going ahead with its investment plans. It is in no way related to divestment.
