CLSA says BPCL’s Bina project to give poor returns

In today’s report to its institutional clients, CLSA says BPCL’s Bina refinery needs $9.5/bbl GRMs to report net profits and while it will open in Q4FY11, it will break even only by FY14; Bina is a case study of deteriorating refinery economics, it believes

BPCL's Bina refinery, which is located in the heart of India, i.e., Madhya Pradesh, will process 120kbpd of crude. BPCL and Oman Oil own 50% each in this project which will become one of the most complex refineries in India. CLSA expects it to earn a premium to Singapore Complex GRMs. Bina will process 65% Arab-Light and 35% Arab-Heavy crude that will be delivered to it via the 935km Vadinar-Bina pipeline. BPCL is almost done with the Rs10.5 billion Bina-Kota product pipeline and marketing terminal at Bina to handle, store and evacuate products from Bina.

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However, the project, while grand, is definitely one of the steepest in terms of costs. CLSA says in its report today, "The budgeted cost of Rs114 billion makes Bina one of the most expensive new-builds globally at $2,319/complex-bpd. The high project cost will still reflect in high capital charges with ~$3.5/bbl of interest expenses and ~ $3.5/bbl of depreciation charges. Together with the opex ($2.5/bbl, we assume pet-coke credit in GRMs), Bina will require $9.5/bbl in realised refining margins to report a net profit." The Bina project is already facing delays, partly because of a delay in the 3x33MW Rs9.5 billion pet-coke-based captive power plant that BHEL is constructing for Bina. CLSA expects the six-month delay to add a further 5%-10% to project costs.

Net-net, BPCL is earning a 24% return on its equity investment in the project, according to CLSA's calculations. The brokerage assumes a terminal realised margin of $10/bbl (a $4/bbl premium to the assumed Singapore margin of $6/bbl) and 13.5% cost of equity and pegs the project's March 2012 fair equity value at Rs46 billion or Rs13.5/Bina-sh. BPCL's equity investment was at an average price of Rs10.9/Bina-sh (post IPO). However, the brokerage is not impressed with these returns. The reason, it point out, is that these returns come six years after Bina was revived in FY07 implying only a 7.4% IRR which slips to an even poorer 7% if you take in the debt BPCL extended to Bina.

"Bina is a case study of deteriorating refinery economics even as BPCL looks to add another 15MT in refining capacity over the next five years," the brokerage says.

The Bina IPO may come out in FY12 which will allow the project to retire some of the debt it owes to BPCL. Both BPCL and Oman Oil have put in Rs 17 billion each in equity into this project. After the IPO, BPCL may own 49%, Oman Oil could own 26% and other investors the rest. CLSA points out that Bina's capital cost is twice as much as Reliance Petroleum. Even adjusted for off-sites, utilities and financing costs, Bina is 44% more expensive than RPET.

CLSA also points out in the report that Singapore margins remain below mid-cycle levels and that it expects complex refining margins to remain subdued for the next few years.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


India implements FTA on goods with Indonesia

New Delhi: Taking its free trade agreement (FTA) with the 10-nation Asean bloc a step further, India has implemented a free trade pact with Indonesia that slashes import duties on thousands of products, like seafood, chemicals and apparel, reports PTI.

In turn, Indonesia will also slash import duties on Indian goods.

Now that the trade pact with Indonesia has come into force, the agreement signed with the Association of Southeast Asian Nations (Asean) bloc in 2009 has become functional with six member countries.

Besides Indonesia, the other five countries with which India has operationalised FTAs are Vietnam, Myanmar, Malaysia, Singapore and Thailand.

While India and the Asean grouping signed a Free Trade Agreement (FTA) on goods in August, 2009, it was to be separately notified by New Delhi for each member country.

The notification bringing the FTA with Indonesia into force from 1st October was issued by the Central Board of Excise and Customs (CBEC).

A commerce ministry official said FTAs with the remaining four Asean members of Asean — Brunei, Cambodia, Laos and the Philippines — are also expected to become functional in the coming months.

Indonesia accounted for $11.7 billion out of total bilateral trade of $44 billion between India and Asean countries in 2009-10.

India and Asean are also engaged in negotiations to broadbase the FTA by liberalising the services and investment regime.

Commerce ministry officials said talks for the proposed pact on services and investments were at an advanced stage.

Prime minister Manmohan Singh is scheduled to visit Vietnam to participate in the India-Asean Summit later this month.


India, China see Dubai as best business location: Study

Dubai: Indian and Chinese firms see Dubai as the leading business centre in the Gulf region, but negative perceptions regarding occupancy costs still remain, reports PTI quoting a new report.

The report, 'Retreading The Silk Road', by Cushman and Wakefield Middle East (C&W), was based on feedback from the firm's agency division which suggested that commercial leasing by companies from South Asia and Asia Pacific has been on the rise.

C&W conducted a series of interviews with Chinese and Indian companies already established in Dubai as well as with those companies considering setting up in the region.

According to the report, across the board, Chinese and Indian companies believe that Dubai offers the best business environment as a result of its location, as well as its superior infrastructure and transport links in comparison with its regional peers.

However, there remains a perception in the market that Dubai is as expensive and overcrowded as it was in the boom years of 2006-2008.

Despite being part of much larger organisations, the majority of businesses are currently operating small satellite offices, with limited space requirements and minimal head-count.

Kausuv Roy, executive director Cushman & Wakefield India, said, "When Indian companies talk to us about setting up an office in the Gulf, Dubai is naturally uppermost in their minds because it meets their needs, offering a friendly business environment, a large expatriate population and historic trade links with South Asia.

"We therefore anticipate an increased number of enquiries for office space to come out of India in the coming period."

Michael Atwell, head of C&W's Middle East operations, said, "Indian and Chinese companies are quite clearly looking at Dubai as the ideal strategic location for their regional business activities. However, it is vital that the city's landlords offer the flexibility and support that these new entrants, who are taking a cautious approach to regional expansion, require.

"Although rents in areas like DIFC remain relatively high, Dubai now offers improved affordability for those looking to set up operations and the city must work harder to challenge any misconception."

The companies interviewed cover a range of sectors - financial services, professional services, IT, leisure and tourism, industrials and manufacturing.


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