With the next budget presentation less than a month away, many of the large investors including FII s have already started structuring the budget expectations in to the investment decisions. Small investors have therefore no choice but to keep this factor in mind when they analyse the market movements during this period. Despite the optimism generally prevalent in the market place, the Sensex moved cautiously in a narrow zone in the last month to end around 3332 at the end of the week. The activity was poor and the markets appeared neglected. 

The border tensions have remained in the political circles and further terrorist actions including hits on the economic targets cannot be ruled out in the next few weeks.  However, investors seem to have largely ignored the tensions even after the firing of the Agni test missile. Barring  major attacks, the sentiments are strong enough not to be affected by terrorist activities.

 The market movements in the next few weeks will therefore be predominantly affected by the run up the budget. Investors are required to keep a close watch on the build up of expectations about the budget since the post budget movement would depend more on the relative disappointment or satisfaction of the pre budget expectations. The choice is to join the speculative band of investors who take a position on the expected direction of the budget and invest accordingly or stay with safe investments which will be neutral to the expected budget proposals.  

One of the major developments in the recent days which need to be kept in mind in the post budget investment scenario is the dismantling of Administered Pricing Mechanism for Petroleum products from April 2002. This will immediately help companies in the Petroleum sector to increase marketing margins as also release the funds blocked with government (which will pay up in the form of bonds, which will be liquid assets). They will also be considered for disinvestment and can attract world leaders and attractive valuations.

In the light of this land mark development it is time for investors to accumulate shares of some of the public sector Oil giants. One such share to be considered is Bharat Petroleum.

Bharat Petroleum Corporation Limited (BPCL) is India’s second largest refinery and marketing company. It’s refinery in Mumbai has a capacity of 8.6 MMT.  The Company recently acquired two stand alone refineries as subsidiaries - Kochi Refinery  and Numaligrah Refinery . They have a capacity of 7.5 MMT and 3 MMT respectively. The total refinery capacity of the group is therefore 19.1 MMT, which is nearly 16.23% of total refinery capacity in India. The company has 21.43% market share in marketing of petroleum products.

For the half year ended September 2001, the company’s profit after tax was Rs 404.8 crores, on an equity base of Rs 300 crores as against the profits of Rs 820 crores for the last financial year. The proportionate  turnover was also marginally lower at RS 20,052 crores as against 45,953 crores for the last year.

The share which had hit a bottom of around Rs 130 in September 2001 has steadily risen to around Rs 206 and is threatening to break out of the previous year high of around 222 reached last April.  On the basis of the half yearly profits, the EPS works out to around 27 and P/E discounting is a reasonable 7.5. There is therefore sufficient scope for improvement in the discounting to at least around 10.0.

After the decontrol, prices of the controlled products like petrol, diesel will move as per the import parity price.  BPCL imports 45 % of its crude compared to the total import content of 70% in the industry. It therefore stands at a competitively superior position in the industry.  Moreover, the location of BPCL's Mumbai refinery on the west coast of the country in close proximity to the Gulf countries provides a slight advantage in achieving lower freight costs.

In terms of product portfolio also, BPCL s expected to benefit from the price changes. Output of BPCL is highest after RPL in percentage terms of light distillates. This segment is expected to get larger benefits due to price revision.

In view of these developments, the Company is expected to improve its performance after April 2002. As per the technical reading, this development should provide sufficient steam for the shares to break out of the previous high and gain at least 25 % in the next few months.  It may therefore be a good idea to accumulate these shares for long term benefits.

 

Na.Vijayashankar

January, 26, 2002