BackBPCL: subsidy, GRM boost to earnings
Bharat Petroleum's net profit declined 81.5% from a year ago to `931 crore, which, to a large extent, was dictated by how under recoveries were financed
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The profitability of a public sector oil marketing company depends on government largesse in a (partially) regulated price regime.
In the September quarter, the government (and upstream oil companies such as Oil and Natural Gas Corp. Ltd) coughed up the requisite subsidy and all oil marketing companies reported profits.
Bharat Petroleum Corp. Ltd’s net profit, though, declined 81.5% from a year ago to ₹ 931 crore. That again was to a large extent dictated by how the government and upstream oil companies financed under recoveries (losses on selling fuel below cost).
The firm received ₹ 10,860 crore as compensation in September 2012, compared with the ₹ 8,588 crore in the latest quarter.
That apart, higher depreciation costs and other expenses took a toll on BPCL’s profit this time around.
Nevertheless, BPCL’s September-quarter performance was better than expected. It also managed to reduce its total debt to ₹ 16,894 crore at the end of September, compared with ₹ 23,567 crore six months earlier.
That was “mainly due to receipt of pending cash compensation from the GoI (government of India)", Nomura Group said in a note.
BPCL remains the best bet in the oil marketing space for a couple of reasons.
For one, the company’s gross refining margin (GRM), a measure of profitability, improved to $4.65 a barrel on a sequential basis, though it was a sharp decline from a year ago. Although Indian Oil Corp. Ltd reported the best GRMs at $6.6 per barrel for the September quarter, IDFC Securities Ltd said in a note, “BPCL has shown the least volatility in GRMs over the last 10 quarters, implying relatively better inventory management than peers."
Secondly, BPCL’s exploration and production (E&P) portfolio provides a hedge against the vagaries of the domestic business and helps it command higher valuations. “Given exploration and appraisal drilling underway in Mozambique as well as Brazil, news flow on E&P is likely to remain positive," Nomura added.
That explains why the BPCL stock has fallen only 10% this year, compared with sharper declines of up to 30% among its peers. Yet, the stock continues to underperform the broader market because of the lack of reforms in the oil marketing space weighing on sentiment. In the near-term, a weak rupee poses a threat to under-recoveries and that could keep upsides limited.
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