India’s three largest oil-marketing companies – Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd., and Hindustan Petroleum Corporation Ltd. – have reported better than expected in March ended quarter. The financial boost was all about INVENTORY GAINS in Q4. However, BPCL performance stood out among the OMCs.
Here’s a snapshot of the various other factors that impacted OMCs Q4FY21 and our experimental play BPCL.
Inventory gains were owing to higher average crude prices. Brent crude – the Asian benchmark for oil – averaged higher in Q4FY21 largely on the back of supply curbs. Generally, higher crude prices mean inventory gain for an oil marketing company. Oil refiners maintain an inventory. If the market price increases, refiners that bought the existing stock at lower prices end up selling through retail outlets at higher rates, and vice-versa.
In Q4FY21, Brent crude averaged around $61.3/bbl – 35% higher sequentially.
The refining segment performance has been sequentially better for all three refiners owing to better product margins. The Singapore GRM – the Asian benchmark – averaged $1.8/bbl, i.e., sequentially 50% higher. Generally, higher gross refining margins mean that the company will earn more for converting a barrel of crude oil into fuel.
The core refining margin, i.e., excluding the inventory gains, was highest for HPCL.
The marketing segment performance was weak in Q4FY21 as OMCs did not pass on the full extent of the crude rally possibly owing to the state elections. Margins on petrol were in negative territory and on diesel languished significantly below normative levels during the election period.
Marketing margins declined 34% and 50%, in Q4 compared to Q3, for diesel and petrol, respectively.
Why BPCL Performance Was Better Than Peers
Not only did BPCL announce a record dividend for shareholders, but also saw growth in sales volume, higher refinery utilisation, and reduction in debt. IOCL and HPCL reported a drop in their sales volume sequentially, while BPCL managed to marginally grow which indicates some market share gains. Also, BPCL’s refinery utilisation was much higher at 122% as compared to 113% and 102% of HPCL and IOCL, respectively. On the balance sheet side, BPCL managed to reduce its debt by 37% in FY21 compared to last year, while HPCL and IOCL did it by only 7% and 12% respectively.
The BPCL Dividend Experimental
Our experimental on BPCL[premium access] was based on dividend and divestment. The dividend factor has played out, while the divestment factor continues to play out. The Government of India is progressing well on the divestment front, as the company’s management confirmed that, potential bidders have been given access to the financial data on April 10, 2021, and they are addressing the queries raised. According to the management, the divestment should complete by the end of FY22.
On the dividend front, since we started our bet on BPCL, the company has announced a dividend of ₹ 63/share (For the full financial year, the company has announced a dividend of ₹ 79 in three tranches – ₹16 in February 2021, ₹ 5 in March 2021 and ₹ 58 in May 2021). The total dividend announced so far and the reduction in debt indicates that the entire proceeds received by the company so far from the sale of treasury shares and stake sale in Numaligarh Refinery Ltd. have been used.
On the dividend front, there could be more to it. The company is yet to sell 1.52% of treasury shares. However, they are yet to take a decision on the same. Recently there were media reports, which said that BPCL would sell part of their stake in two listed entities – Petronet LNG Ltd. and Indraprastha Gas Ltd. However, the company said, they have no intention of selling their stake and they are working closely with the regulatory authority on the regulation regarding the open offer.
As BPCL is a promoter entity in Petronet LNG and IGL, a change in ownership in BPCL will also trigger an open offer in the latter companies. Thus, BPCL might consider offloading part of its stake to shed its promoter status, which will, in turn, prevent the prospective owner to make an open offer for these companies. However, their intention remains to hold their entire stake in these companies.
What Lies Ahead Fundamentally
In Q1FY22, the OMCs could well again report an inventory gain given the trend in crude prices so far. Brent crude has so far averaged higher at $66.5/bbl as against an average crude value of $61/bbl in Q4FY21.
The marketing segment, which started the current quarter on a weak note, is showing signs of improvement, due to price hikes taken post the state elections. On the refining side, the Singapore Gross Refining Margins improved to $2.5 per barrel, due to a fall in inventory levels. However, sequentially, earnings could be weak in Q1FY22, as lockdown led to lower fuel sales. According to OMCs, in April and May 2021, fuel sales were 30% lower compared to 2019.
So far, investors have gained close to 8% or ₹ 35/share (₹ 30 increase in share price+₹ 5 dividend already paid) on our entry price of ₹ 445. The final dividend announced of ₹ 58 indicates a dividend yield of 13% on entry price. However, the final dividend is yet to be paid. It will be paid within 30 days post its approval in AGM – which in the past two years usually takes place in August/September.
So, we continue to hold this experimental play as we expect some gains on positive divestment news flow, another potential small dividend, and steady financials. The risks involved are a delay in divestment, protests by various stakeholders regarding BPCL privatisation, sharp fall in crude prices, and a bigger than expected impact of a potential third wave of coronavirus.
Other Relevant Reading:
Experimental: Betting on the Government To Sell BPCL [Premium]
BPCL: To Buy Or Not To Buy? [Premium]
Hurt By Refining, Saved By Marketing: This Quarter For OMCs
Reliance: Counting on Jio & Retail to drive growth [Premium]
SBI Cards: Does it have an edge in India’s digital payment ecosystem? [Premium]
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