Flighty spin

BS Compass

The exit of Moser Baer's auditors needs some explaining.

Moser Baer has been trading at low single-digit PEs for quite a while, thanks to the volatility in its business which is caused either by change in regulation or some other reason.

Based on Monday's closing price, for instance, the company's valuation worked out to around five times FY04 earnings. This, despite growing earnings at a compounded rate of over 30 per cent in the last two years.

But things got even worse on the valuation front after news came out that its statutory auditors have resigned. Interestingly, the auditors had completed the half yearly audit, but had not completed the full-year audit.

According to the talk going around in market circles, there is something fishy about the sudden resignation of the statutory auditors.

This is amply supported by the near 20 per cent fall in the company's stock price on Tuesday. Even after the bounce back on Wednesday, the stock is down 14 per cent from Monday's levels, resulting in a valuation of just over four times FY04 earnings.

Just based on business fundamentals, the company seems on much better footing now. Till recently, its exposure to the European Union stood at around 60 per cent of revenues.

This has come down to 40 per cent, and is expected to come down further, what with the company having received a $100 million from Imation earlier this year.

Besides, the 7.3 per cent anti-subsidy duty imposed on Moser Baer recently is not expected to hurt much. The mismatch between demand and supply has led to buoyant price scenario, which means the company will be able to pass on the levy to its customers.

To add to all this, the company has a book vale of Rs 240, which is now close to its market price. But on the flip side, CDR prices have been volatile, which is reflected in the low valuations. The corporate governance issues that have now cropped up only add to the negative sentiment.

BPCL

The June quarter witnessed a decline in import parity prices of petroleum products. This was reflected in the form of loss on inventories carried over from the March quarter, which was estimated at around Rs 500 crore.

Further, there was also a loss on subsidy for LPG and kerosene to the tune of around Rs 470 crore in the quarter. Despite the loss and a marginal slowdown in market sales, the company reported a growth of 30 per cent in net profits.

Analysts say that this was due to the considerable increase in marketing margins compared to the corresponding quarter. The high crude price also meant a loss in refining margins in the quarter, which fell 8 per cent to $3.98 per barrel.

However, the impact of the losses on inventory and subsidies was negated somewhat due to prior period gains and benefits due to fixing of crude supply from ONGC, which was being accounted for on a notional basis.

The fixation of price of crude has led to a write-back of Rs 179 crore for the period of FY03 and the prior period recoveries from the government amounted to Rs 200 crore in the quarter.

While the marketing margins are stable currently compared to the June quarter, BPCL's performance in the remaining nine-months will depend on the prices of crude globally as well as the import parity prices of petroleum products.

Any increase in the crude price may result in a squeezing of refining margins and any firming up of product prices will imply an increase in the subsidy losses on LPG and kerosene.

Also, BPCL will be able to sustain its marketing margins only if it is able to pass on the increase in import parity prices to the consumers. While both HPCL and BPCL are similar fundamentally, the main driver in the near-term is divestment of BPCL.

The divestment, which is expected over the next 6-8 months, is sure to bring in supernormal gains. Compared to current market price, analysts expect appreciation of at least 50 per cent as a result of an open offer from the strategic investor.

Therefore, short of any disastrous impact on the company's performance, BPCL's stock price will largely be stable.

With contributions from Mobis Philipose and Sameer Ranade