The Centre may be mulling a strategic stake sale in state-run oil marketer Bharat Petroleum Corporation Ltd (BPCL) soon, but analysts say the company is likely to have a “difficult” financial year as demand for high volume products fall and high capital expenditure requirements place an additional burden on its debt levels.
The recent disclosures of its second-quarter financial results only underscore the trouble the company is facing. While its net profit shot up by 40.18 per cent year-on-year (YoY) Rs 1,708.45 crore, the jump is primarily due to gross tax reversal of Rs 580.3 crore based on a series of favourable judgments from the Income Tax Appellate Authorities.
The firm’s other metrics reflect declining demand in the domestic market with lower profitability at the refining stage indicated by a sharp drop in gross refining margins.
For instance, its total revenue from operations fell 9.48 per cent to Rs 75,057 crore in the July-September quarter, with domestic demand for diesel actually contracting during the period by 2.5 per cent.
The fall in diesel demand, primarily due to the wide-spectrum economic slowdown hitting freight transportation, has even forced the company to continue exporting diesel this quarter too. According to N Vijayagopal, BPCL’s director of finance, the company is looking to export around 200 to 300 thousand metric tonnes of diesel every month, mainly from its Kochi refinery.
Diesel alone makes up about 45 to 50 per cent of the production from refineries. As for gross refining margins, it recorded an average GRM of just $3.10 per barrel for the half-year ended September 30, less than half the $6.52 per barrel during the same period last year.
With capex requirements also high for the financial year, analysts believe that the company’s debt leverage will also be placed under pressure.
“BPCL’s earnings missed estimates driven by weak GRMs, lower refining thruput, lower marketing volume growth and higher forex loss,” noted JMFL analysts Probal Sen and Akshay Mane, pointing out that the firm’s GRMs for the quarter have fallen 32 and 46 per cent at the Mumbai and Kochi refineries respectively and that near term prospects remain weak “given BS VI related shutdowns and weak demand growth”.
“BPCL has aggressive expansion plans for all segments over FY20-24E,” the analysts said, with the second phase of the Kochi Petchem project requiring Rs 11,000 crore, the Numaligarh expansion (Rs 22,000 crore), the Mozambique LNG project at Rs 30,000 crore and city gas distribution projects worth Rs 50,000 crore lined up over the next five years. “The aggressive capex plans and renewed pressure of direct benefit transfer outstanding will weigh on leverage,” the report concluded.