BPCL: Crude affair

Inability to pass on higher prices to customers impacts performance.

The performance of Bharat Petroleum Corporation (BPCL) in the March 2007 quarter was adversely affected by its inability to pass on higher prices of crude-based products to its customers.

Analysts also highlight a high base effect in the March 2006 quarter, owing to the receipt of oil bonds worth Rs 2,160 crore from the central government, which led to a lacklustre performance in Q4 FY07.

As a result, operating profit declined 33.5 per cent y-o-y to Rs 1273.8 crore in Q4 FY07, while its net sales grew 6.55 per cent to Rs 24,126.5 crore. Its operating profit margin also declined 320 basis points y-o-y to 5.3 per cent in the last quarter.

The results were declared after the close of trading on Thursday, but the stock had already declined 3.5 per cent to Rs 371.

The company's market sales of petroleum products were 6.31 million tonne in the last quarter, a growth of 11.9 per cent y-o-y. Analysts estimate the company's under-recoveries of Rs 2,900 crore in Q4 FY07.

As per the subsidy sharing formula, upstream players such as ONGC's share of the subsidy burden stood at Rs 1184.5 crore in the last quarter, coupled with oil bonds worth Rs 900 crore received from the government.

A small cushion for the company's margin was provided by higher gross refining margins (GRMs) - it was $3.64 per barrel in FY07 for its Mumbai refinery as compared to $1.64 per barrel a year earlier.

The company's throughput in its refinery division was 5.27 million tonne in Q4 FY07 compared with 4.93 million tonne a year earlier. For FY07, consolidated operating profit margin grew 220 basis points y-o-y to 4.4 per cent.

The stock trades at 9 times estimated FY08 earnings, given the uncertainty on the company's ability to pass on higher global crude oil costs to end customers.

PNB: NPA, staff cost blues

Punjab National Bank (PNB) had a weak quarter owing to higher staff expenses and rising non-performing assets (NPAs). Net interest margin declined from 4.21 per cent in the nine months ended December 2006 to 4.07 per cent in March 2007.

This is despite the fact that the bank enjoys a high proportion of low-cost deposits (current and savings accounts), which declined marginally "" from 47.3 per cent in December 2006 to 46.2 per cent in the last quarter.

Interest costs increased 37.5 per cent, while interest income went up 28.4 per cent. Nevertheless, the growth in net interest income was quite good at 18.6 per cent y-o-y.

But staff expenses were 122 per cent higher on a y-o-y basis owing to higher provisioning on account of pension liabilities by Rs 300 crore. This resulted in operating profit declining 14.7 per cent y-o-y during the quarter.

Like some other banks, PNB too is reducing its reliance on bulk deposits, which are more expensive. Its deposits went up 16.9 per cent y-o-y, and 7.4 per cent increase q-o-q.

Since the end of Q2 FY07, gross non-performing assets are up a substantial 9.7 per cent. Loan growth was up 29.4 per cent y-o-y, which is in line with the industry growth.

PNB is one of the better-managed PSU banks, and with a high base of low-cost deposits, it is in a good position to maintain its margins, which are higher than even private sector banks.

Like the other large banks, it too will be tapping the capital market to increase its capital adequacy ratio. At 1.4 times estimated FY08 book value, there could be some upside.