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Bharat Petroleum Corporation Ltd (BPCL) with an annual turnover of around Rs534bn (US$12bn) is engaged in the business of refining crude and marketing of petroleum products. While it has a Refinery at Mumbai, the marketing and distribution network covers the length and breadth of the country. The Government of India holds a 66.2% stake in the equity of BPCL; and balance is held by the public, employees, FIs, Mutual Funds and FIIs.
Born on 15th August 1951, Mr. S K Joshi is a member of the Institute of Chartered Accountants of India. He also holds a M.B.A. degree from the Hull University in the United Kingdom. He joined BPCL in 1978 and since then has held senior positions in the Finance function. Presently, he is heading the Corporate Treasury function and is responsible for the overall fund management, risk coverage of assets and foreign exchange management. Prior to that, he headed the Management Accounts set-up and was responsible for the Corporate Accounts, Budgeting and performance evaluation.
Speaking with R. Venkataraman and Toral Munshi of India Infoline, Mr. S K Joshi discusses the growth prospects of the oil and gas industry and the strategies of the company going ahead.
What is your outlook on the crude oil prices?
International crude oil prices have touched new highs in the recent time with WTI moving beyond $55/ bbl primarily based on growing demand from Asia and supply concerns. There have been no major discoveries in the past few years. The Geo political considerations have also impacted oil prices. This has resulted in increased tightness between supply and demand. We have also seen the emergence of import dependant zones such as Asia and North America and supply zones such as Middle East and Russia. The oil prices are expected to move downwards with the projected increase in Middle East and Non-OPEC output, however, the days of $30/ bbl looks distant.
In the near term I see these factors sustaining but not necessarily extending the price rise (ruling out a major shock, act of terrorism, etc.).
What trend do you foresee in Global refining margins?
The refining industry is a cyclical industry. In the last couple of years global margins have been excellent with 2004 margins being the highest in last decade. With continuing high crude prices driven by upsurge in product demand, we believe margins will continue to remain firm in the medium term.
What is the actual average cost of crude for India in the current scenario?
Globally crude prices are driven by West Texas Intermediate (WTI) and Brent benchmarks and India is no exception. Although India?s import comprise of variety of crudes linked to different benchmarks, what we pay would typically be $5-6 below these benchmarks.
What has been the impact of the duty cuts in the budget?
There has been reduction in average duty protection between crude and products by more than 2%. Duty protection is now 3%.
What is the status on BPCL-Kochi merger?
The merger ratio has been fixed at 2.25:1, i.e., a KRL shareholder will get one BPCL share for every 2.25 KRL shares. The appointed date of merger has been fixed as 1.4.2004. The approval from the Government is being awaited.
What will be the financial benefits of the merger?
The merger would not only result in better synergy in refining operations, but also lead to financial savings in fiscal levies.
What are the plans for capacity additions at the Kochi refinery?
It has been proposed to undertake Kochi Refinery modernization coupled with capacity expansion from 7.5mn tons to 10.5mn tons in the next 3 years.
What is the status on the Bina refinery project? When will it commence operations? Would the project be profitable?
A MOU has been signed with the MP Government for the Bina refinery. The outlay on the refinery would be around Rs70bn. The project would be viable with concessions such as the deferment of commercial tax by the State Government.
With India already having excess refining capacity, how do you see these expansions add value to the company?
The consumption growth in India has averaged 4% pa. Demand is currently at about 112mn tons. We expect this to touch 150mn tons pa in the next 5 years. So increase in capacity will be in line with the demand growth projections.
An equal sharing of subsidy burden among all petroleum sector players, including domestic and private refining companies is being suggested. Is it feasible to work out such a sharing arrangement?
There is certainly a scope for increasing prices and a hike is inevitable. SKO & LPG prices have been frozen at 2002 levels - when kerosene was at US$20 per bbl and LPG was at US$180/MT. Today kerosene has touched US$60 per bbl and LPG prices are at US$430/MT. We have seen only about Rs 40 per cylinder LPG price increase during this period with no change in kerosene prices. In the long run, consumers should pay for the economic price of the fuel. Subsidies, if any, should come only from the central budget and that too in direct form rather than artificially lowered prices.
However, in short run, when the citizens are not in a position to absorb high prices, there is a need to look at what each of the players can bear. Today, the marketing companies are bearing major portion of the subsidies. Fractionators and upstream companies are sharing a smaller portion. The Government has also chipped in with tax changes. There is a need to broaden this base with introduction of the other players as well. The arrangement, if worked out, can certainly not be based on commercial understanding and will have to be through Government intervention.
Are we likely to see comeback of the oil pool account?
The oil industry?s capacity to bear the subsidy burden is decreasing. However we cannot compare the situation today with 1973 when the Oil Pool Account came into existence. At that point of time, India was 76% self reliant in oil. Today, we are 70% import dependant. The pool concept of "internal cost of manufacturing" therefore would not work as we are paying for 70% of crude at international prices. In any case, a price increase is inevitable even for the pool to generate any amounts.
What would be your market share in the four key products HSD, MS, LPG and SKO?
BPCL is second largest petroleum marketing company with an overall market share of 22% in retail products. The product wise market share in HSD, MS, LPG and SKO is 27%, 32%, 25% and 16% respectively.
What is the current product yield for the company and what are your plans to improve the same? On the complexity index where does BPCL?s refineries stand at compared to other refineries in India?
We have a greater contribution of lighter end in the total yield. The hydro cracker that we are setting up will enable us to increase our heavy crude processing from 35% to 50%. We also have a capacity to produce 1.8 lakh tons of lube oil base stock.
What kind of capital investments are being made by refiners to meet the Euro III compliance norms?
Mumbai Refinery modernization project is being implemented with a total capital outlay of about Rs18bn in order to meet the Euro III norms. There are similar plans for Kochi Refinery also.
How many retail outlets does BPCL have? How many additions are likely to be made in the next couple of years? What is the ownership pattern of these outlets?
We have around 6400 outlets. We added close to 880 outlets in the last fiscal and addition of more than 1000 outlets is being planned in next couple of years. Out of the total outlets, we have control over the sites of more than 70% outlets indicting high level of site security.
What would be your average throughput per outlet?
BPCL has always been ahead of the industry in terms of thruput per outlet. Our throughput is almost 15% higher than the industry average.
What initiatives has BPCL taken to improve branding and customer retention especially in view of impeding private sector competition?
BPCL has been a pioneer in retail marketing. Branded petrol, petrocards, fleetcards, convenience stores, one stop shop, pure for sure etc are only some of the initiatives that BPCL has successfully implemented over the last few years. The focus going forward is to increase customer loyalty, systems and management culture have been aligned to ensure the same. Customer service and convenience would be central to the retail marketing initiatives. BPCL is also looking at aggressively increasing non-fuel revenues.
In retailing the Private competition thus far has been slow in expanding their retail presence.
What has been the impact on demand for petrol and diesel following mandatory conversion of vehicles to CNG in metros?
There has been some impact on the diesel/petrol demand with automobiles converting into CNG. We recognize that alternate fuels are a reality now and believe that there would be an increasing thrust on environmental friendly auto fuels.
We are already focusing on gas and have entered into partnerships with Petronet LNG and Indraprasth Gas. We have got into city distribution in Delhi, Pune and Kanpur with a complete mix of domestic piped gas, Auto CNG and LNG for commercial establishments. Natural Gas would be the future generation fuel with its share in the energy basket expected to rise from current 8% to about 20% in the next 15 years. We are therefore poised to retain our share in the energy market.
What is the long term outlook for demand growth?
India along with the other BRIC (Brazil, Russia, India & China) countries is expected to report strong economic growth. Rising Per Capita incomes have led to rise in purchasing power especially of middle income group. The share of transportation (both leisure and transport of goods) in Private Final Consumption expenditure has risen from 2.6% 20 years ago to 13.5% today, and is likely to go up further. Take the case of China, where private vehicle ownership was first allowed in the country in 1984, had witnessed a manifold increase in air and road transport. BPCL with its focus on retail is well placed to reap the benefits of such multifold growth in India.
How would you rate BPCL viz a viz competition?
BPCL has created a right niche in the market with its retail focus, gas presence and Euro compliant refining capacities. With a market share of 22%, adequate refining capacity and an asset base of around US$2bn, we are positioned strongly against competition.
We have also been able to address our refining capacity concern to a large extent. With 12mn tons in Mumbai Refinery, 3mn tons in Numaligarh Refinery and 7.5mn tons in Kochi Refinery, we would have a total group refining capacity of 22.5mn tons against a retail market share of 23mn tons. We will also have refining capacity in Central India, once Bina Refinery project comes on-stream.
What new policies from the Government do you see being implemented in order to deregulate the pricing in the sector?
We have seen price hike of Rs1.50 per litre and levy of Re0.5 per litre cess on petrol and diesel in the current fiscal. The current prices are based on crude price equivalent of US$45 level. The increase in global oil prices in the past few months has been dramatic. A rise in prices to above US$55 levels will take import dependent countries like India some time to digest. Yet, given the strong economic resilience, we have been able to absorb the increases of up to US$45 per barrel quite easily. However, stress would continue if oil goes beyond US$60. Government on its part has tried to rationalize the indirect tax structure to absorb some of the price hike and is also working towards subsidy scheme and sharing of subsidy burden. There is still some scope for State Governments to reduce sales tax/ local levies that are advalorem in nature and have not been rationalized even though oil prices have gone up from sub $30/bbl level to $55/bbl level. We expect Government to clear the Petroleum Regulatory Authority Bill for Oil & Gas sector and address the issue of reforms in oil subsidies.
Any message for your shareholders?
Energy sector is bound to grow with the rising economy. We are also going to be benefited by the sectoral growth with strong presence in the retail segment backed by physical assets and information technology infrastructure. BPCL has always worked towards enhancing the shareholders value with good corporate governance.
India Infoline Research Team / 08:49, Aug 21, 2014
The outlook is a flat open. Global indices are up. The minutes from the Federal Reserve's July meeting indicate that the Fed is in no hurry to raise interest rates. The Dow added 0.35% while S&P was up 0.25%. Nasdaq ended marginally lower. Asian indices are mixed with Nikkei up almost a percent while Hong Kong's Hang Seng index is lower. South Korea's Kospi index and China's Shanghai index are also in the red.