• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Raghuvir Srinivasan

The BPCL CMD, Mr Sarthak Behuria... Will he be bogged down by subsidies?

BHARAT Petroleum Corporation's results for the fourth quarter of 2003-04 are largely in line with expectations. That is, after adjusting for the one-time income of about Rs 200 crore in the fourth quarter of 2002-03.

The reported earnings for the January-March 2004 quarter show that profit before tax dropped about 12 per cent to Rs 659 crore from Rs 748 crore in the same period last year. But the critical part is that the company received and accounted for a sum of Rs 200 crore as final dues from the Oil Pool Account (since disbanded) during January-March 2003.

Adjusted for this, Bharat Petroleum's pre-tax profts grew 20 per cent in the fourth quarter. The company has benefited from the strong refining margin of almost $5 per barrel that prevailed during this period. In fact, the refining margin for fiscal 2003-04 was $4.64 per barrel compared to $3.71 in 2002-03.

Adding an extra layer to the margins were the company's cost control efforts. While finance costs dropped by half for the whole year, staff costs remained at almost the same levels as 2002-03. Sticking to its conservative accounting policy, the company fully wrote off the investments in new LPG cylinders. The Central Government's scheme of sharing the LPG/kerosene subsidy burden across upstream companies ONGC and GAIL has helped Bharat Petroleum. The company received about Rs 582 crore as discounts from the two companies on crude oil and LPG/kerosene sourced from them. This also played a part in boosting the overall margins of Bharat Petroleum.

The impact of non-revision of retail prices of the transportation fuels — petrol and diesel — since January was not felt much by the oil companies, including Bharat Petroleum, simply because the international prices were still in the $28-30 per barrel range.

However, the picture could turn different now with the sharp spike in international oil prices, which have gone past the $41-per-barrel mark. It will be a double whammy for Bharat Petroleum and, indeed, the other oil refining and marketing companies. First, the current retail prices are below costs, which means they are suffering a negative margin on petrol and diesel.

Second, the scheme of upstream companies sharing the LPG/kerosene subsidy lapsed with the last fiscal, which means Bharat Petroleum will not get any discounts on the crude and LPG/kerosene it sources from ONGC and GAIL.

The company has to bear the subsidy for the LPG and kerosene it sells and with oil prices increasing now, the subsidy will already have shot up from the levels of the previous year. In 2003-04, Bharat Petroleum received Rs 580 crore from ONGC and GAIL as their share of the subsidy burden.

This is, of course, assuming that the new government does not take immediate action and prefers to maintain the status quo on both the subsidy issue as well as retail prices of transportation fuels. There are a few options that could be considered, such as dropping excise duties on petrol and diesel, setting up a Price Stabilisation Fund or simply allowing the oil companies to raise retail prices.

The outlook for Bharat Petroleum, therefore, appears clouded at this point in time. The stock has taken a beating following the statements of the winning political combination at the Centre expressing reservations on privatisation.

There was a premium on the stock in the last few months on the expectation of the privatisation programme being resumed after the elections.

The market has now corrected that premium in the valuation. The price-earnings multiple has dropped to around 6 times from close to 9 at the peak valuation.

The stock is likely to remain range-bound at current levels till the new government's approach to the issues of pricing and subsidy crystallises. Shareholders can stay invested in the stock for now.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment Quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line