BPCL: Slick numbers

Refining margins are expected to remain strong.

Bharat Petroleum Corporation Ltd leveraged improved gross refining margins (GRMs) on a y-o-y basis in its refining division in the June 2007 quarter, which helped it to offset mounting under-recoveries in retail sales of auto fuels and kerosene due to surging international crude prices.

As a result, operating profit (excluding other income) was Rs 206 crore in Q1 FY08 compared with an operating loss of Rs 260.9 crore in the previous year, while its net sales grew 5.1 per cent to Rs 23,869.4 crore. Meanwhile in its refining division, the crude throughput was 5.15 million tonne in the June 2007 quarter compared with 4.88 million tonne a year earlier.

In addition, its GRM at Mumbai refinery was $6.5 a barrel in the last quarter compared with $5.41 a barrel a year earlier. The regional benchmark Singapore refining margin was $9.5 a barrel in the last quarter, a rise of 7 per cent y-o-y.

To offset BPCL's under-recoveries on sales of auto fuels, kerosene and domestic LPG, as part of the subsidy sharing mechanism, upstream players provided Rs 963 crore in the June 2007 quarter compared with Rs 1,380 crore a year earlier.

BPCL has highlighted that the subsidy burden shared by upstream players only partially offset its marketing under-recoveries for these petroleum products in Q1 FY08.

Going forward, refining margins for BPCL are expected to remain strong, in tune with the global trend. Also, BPCL, like other oil marketing companies, is expected to receive oil bonds from the central government and that should help improve the financial health of companies in this sector. At Rs 321, BPCL trades at over 7 times estimated FY08 earnings.

ABG Shipyard: Sailing smooth

ABG Shipyard's operating profit grew 27.3 per cent to Rs 55 crore in the last quarter, while its net sales expanded 22.7 per cent to Rs 203.34 crore. Its operating profit margin also improved 90 basis points y-o-y to 27 per cent in Q1 FY08.

Though ABG Shipyard did not deliver any vessels in the last quarter, the company books revenues on a percentage completion (of a vessel under construction) method. In addition, the company also kept a tight check on operating costs in the last quarter, which helped improve operating margins.

ABG's current order book stands at Rs 5560 crore. One of the prominent orders bagged by the company in the last quarter was the $139 million (Rs 618 crore) from Essar Shipping for construction of four supramax bulk carriers.

ABG had earlier acquired Vipul Shipyard, which is located close to its existing facilities. The acquisition would help ABG enhance its shipbuilding capacity from 32 to 40 vessels on a modular basis. The stock trades at a reasonable 16 times estimated FY08 earnings, and should do well.

State Bank of India: Asset concerns

State Bank of India (SBI) has appreciated over 7 per cent since its June 2007 results, which beat market expectations. Its net interest income went up 15 per cent y-o-y on the back of a 29 per cent loan growth during the quarter.

Though it managed a 132 basis points y-o-y improvement in the yield on advances, the yield on investments declined 100 basis points.

Higher deposit rates meant that its cost of deposits went up 72 basis points in Q1 FY08. As a result, net interest margin was maintained at 3.31 per cent sequentially, but was 6 basis points lower on a y-o-y basis.

Pre-provisioning operating profit excluding treasury gains grew 18 per cent y-o-y. This is the continuing of the upward trend which began in Q4 FY07 after a lacklustre performance in operating profit for the first three quarters of FY07.

However, its asset quality is disconcerting-its gross non performing loans went up 10.7 per cent y-o-y and 7.6 per cent sequentially. Deposit growth at 19 per cent was unimpressive, and low cost deposits declined 16 basis points y-o-y.

The bank managed to control operating expenses at 5.8 per cent and reported an operating profit growth of 30.8 per cent. Also, non-interest income played a significant role in higher operating profits. At the net level, a write-back of investment depreciation amounting to Rs 377 crore led to a 78.6 per cent increase in net profit.

The bank's growth numbers may be better than those of other state-run banks, but are not as good as ICICI Bank's, which has clocked higher growth in both loans and deposits. Non-performing loans is likely continue to put pressure on the financials.

Analysts have upgraded its earnings estimates by 4-7 per cent for this year and next, but the recent price increase has factored in the short-term upsides, considering that there will be dilution ahead. The bank trades at 2.4 and 2.1 times its estimated adjusted book value.