OMCs: Double-whammy

Oil marketing firms take brunt of mounting subsidies and oil spike

With high crude prices and mounting subsidy losses, it is no surprise to find the profitability of oil marketing companies (OMCs) tumble in the December quarter.

HPCL and BPCL reported operating losses of Rs 879.59 crore and Rs 910.4 crore, respectively. IOC, too, saw a sharp drop of 86.65 per cent y-o-y in its operating profit to Rs 160.8 crore in the last quarter.

A fall in gross refining margins for OMCs coupled with mounting losses on sale of auto fuels, LPG and kerosene have led to the weak performance. Refining margins for OMCs have eased broadly in line with weaker benchmark Singapore refining margins.

For IOC, subsidy losses were estimated to have risen by 28.2 per cent y-o-y to Rs 4,730 crore in the last quarter, according to analysts. However, upstream players provided Rs 1,720 crore and standalone refinery discount of Rs 1,500 crore, which cushioned some of the losses.

Meanwhile, in the case of HPCL, analysts estimate subsidy losses on LPG and kerosene to have grown by 23 per cent y-o-y to Rs 1,500 crore in the last quarter. This impact was partially offset by the sharing with upstream and standalone refiners.

OMCs have been hit by losses on auto fuels such as petrol, which were estimated at Rs 2.2-2.3 a litre in the last quarter. Also, losses on LPG and kerosene have grown owing to higher propane and kerosene prices in the last quarter.

Given the continued strength in international crude oil prices, an improvement in operating environment for OMCs is not anticipated unless there is a corresponding change in retail fuel prices.

Maruti: A smooth drive

A combination of better prices, lower costs and lower depreciation have boosted Maruti's profits for the December quarter.

While volumes grew just about 6.5 per cent y-o-y, higher realisations resulting from the price increases that the company took, helped it post a sales growth of 10.7 per cent y-o-y to Rs 3,114.17 crore.

Operating profit saw a smart increase of 30.4 per cent y-o-y to Rs 456.86 crore as the company managed to save on raw materials and components "" the ratio of raw materials to sales dropped to 76 per cent from 78.6 per cent in Q3 FY05.

Thus, the operating profit margin expanded 220 basis points to 14.9 per cent. It would appear that the Swift is more profitable than was earlier perceived. The net profit saw a smart 41 per cent rise as both interest and depreciation were lower.

Meanwhile, Maruti's passenger car sales in January were up just 7.5 per cent y-o-y, driven by sales of 21.2 per cent in the A2 segment, which accounts for 65 per cent of volumes.

However, total sales were up just 3.2 per cent following a decline in other car segments, MUVs and exports. The company is unlikely to be able to ramp up sales significantly until it introduces the diesel engine expected in November this year. Till such time, the Swift is likely to drive Maruti's business.

However, excise relief in the Budget could help push sales to some extent. At Rs 745, the stock trades at 16 times FY07 and is reasonably valued, with possible upsides from the Budget and the diesel engine.

Apollo Tyres: Global binge

Apollo Tyres has become yet another Indian company to make an acquisition abroad. The company will be buying Dunlop South Africa (Dunlop SA) for about Rs 290 crore.

Dunlop SA has two plants with a capacity of 25,000 tpa each in South Africa and a 9,000 tpa plant in Zimbabwe. Dunlop SA is estimated to have revenues of about Rs 950 crore in South Africa and Rs 50 crore in Zimbabwe during 2005.

The deal seems good for Apollo as it gains manufacturing presence in South Africa. Dunlop SA manufactures the entire range of tyres, and also exports its products to Europe and Central Asia. Apollo will also gain technology from Dunlop, which will strengthen its presence in India.

In the December 2005 quarter, high rubber prices led to 33.6 per cent y-o-y increase in raw material costs for Apollo Tyres. Nevertheless, operating profit increased 27.15 per cent y-o-y to Rs 53.86 crore, compared to an 18,84 per cent rise in revenues.

Operating profit margin too went up by 52 basis points to 7.93 per cent. But its ongoing capex led to a higher depreciation burden and interest costs, and net profit declined by 0.41 per cent to Rs 16.44 crore. At the current price of Rs 310, the trailing P/E works out to 18.8.

With contributions from Amriteshwar Mathur and Shobhana Subramanian