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BPCL reported better than expected net profit for the quarter ended September on the back of government and upstream companies compensating about 98 per cent of the underrecoveries on sale of retail fuel like diesel, kerosene and LPG.
The gross refining margins (GRMs) of $4.38 a barrel were also higher, albeit marginally, compared to analysts’ expectations of about $4 a barrel. Going forward, BPCLs’ management expects the GRMs to trend along similar levels.
For the quarter gone by, government compensation stood at Rs 4,401 crore (50 per cent of gross under-recoveries) while discounts given by upstream companies (like ONGC) stood at Rs 4,186 crore (48 per cent of gross under-recoveries) and was adjusted from BPCL’s purchase cost.
As a result, BPCL had to bear the remaining Rs 209 crore of underrecoveries. While net profits were down 81.5 per cent year-on-year at Rs 931 crore, it was better than consensus expectations of a net loss of Rs 1,364 crore—some analysts, however, were expecting profit to be around Rs 300-400 crore.
Niraj Mansingka, associate director, institutional equities, research, Edelweiss Securities, says, “BPCL results were better than expected and were driven by government compensation towards under-recoveries. GRMs too are higher than our expectations.”
Given the ad-hoc nature of government compensation for underrecoveries, the quarterly net profit for oil marketing companies like BPCL remains unpredictable thereby reducing earnings predictability. In absence of these pay-outs, companies also have reported net loss in some of the earlier quarters.
Analysts’ estimates thus also vary. The sharp fall in BPCL’s net profit could also be attributed to the over-recovery of about Rs 1,830 crore in the September 2012 quarter towards subsidy and forex gain of Rs 1,170 crore, leading to a high base effect in the quarter gone by. Additionally, in the September 2013 quarter, BPCL booked forex loss of Rs 490 crore. For the first half of FY14, the same stood at Rs 1,430 crore versus Rs 445 crore in the year-ago period.
Net sales though came in lower than expectations of Rs 67,465 crore and stood at Rs 61,757 crore (up 8.6 per cent year-on-year). The crude throughput stood at 6.04 million tonnes (mt) in the quarter, up 1.7 per cent year-on-year, while sales volume was largely unchanged at 7.79 mt versus 7.77 mt in the year-ago period, owing to slowing demand for petrol. Overall, numbers were better than Street expectations.
The BPCL scrip, which was gradually trending lower through the day, fell from Rs 337 levels to an intra-day low of Rs 329.05 before closing down two per cent compared to the previous day’s close of Rs 339.85. Since May this year, the stock has seen high volatility as a result of the rupee’s fall and then recovery. It fell from Rs 425 levels to its 52-week low of Rs 256 on August 6, but later recovered to Rs 370 levels in early November. Given the recent weakness in rupee, the stock has been slipping in the past one week.
Analysts also believe the concerns on the under-recoveries front will ease in the long-run, though some pain will remain as companies may hesitate to hike prices due to elections.
“The markets seem to be ignoring positives such as continued price increases for diesel. We think the subsidy problem is less menacing now and expect under-recoveries to decline a sharp 56 per cent by FY16. BPCL’s valuations are very undemanding and (we) have a Buy rating on the stock”, said Anil Sharma, analyst at Nomura Equity Research. He has a target price of Rs 465 on the stock.
Others like Mansingka of Edelweiss Securities, too, have a positive view on the company.
“We are positive on the scrip given the potential upsides from upstream business and positives from diesel price deregulation. BPCL is our top pick among the OMCs (oil marketing companies) and we have a 12-month target price of Rs 421 on the stock”.
