Refineries hit by lower margins in the March quarter

Lower petroleum prices—following lower demand—hit gross refining margins of refineries. The standalone refineries were hit more

Sales for all the integrated oil marketing companies and standalone refineries have been on the rise but operating profit was down in the March quarter thanks to lower gross refining margin. The largest oil marketing company (OMC) Indian Oil Corporation posted growth of 31% in sales in the March quarter and its operating profit was down 3%. It posted a 16% drop in fourth-quarter profit. Among the other two OMCs, Bharat Petroleum Corporation posted 42% growth in sales in the March quarter but its operating profit was down 73% in the same period and Hindustan Petroleum Corporation posted 25% growth in sales in the March quarter over the year-ago period and its operating profit was down 73%.
 
Reliance Industries (RIL) which has interests spanning from petrochemicals to oil & gas has posted higher revenue in the refining segment because of capacity addition in the Jamnagar refinery, and Reliance Petroleum’s merger with RIL last year boosted revenues.

The reason behind the poor performance of refineries is the lower gross refining margin, which is the single most important parameter that determines how profitably a refinery is run. In the last fiscal year GRM was depressed because of slower global economic activity softening international petroleum product prices.

As GRM for the domestic refining industry is calculated based on the international price, lower price of petroleum products has affected the GRM of the integrated and standalone refineries which is reflected in their quarterly results.

Standalone refineries were hit harder. Chennai Petroleum posted a net loss of
Rs61 crore in the March quarter against a profit of Rs418 crore in the year-ago period. It posted a 33% growth in sales in the March quarter over the year-ago period and yet operating profit was down 71% in the same period. Mangalore Refinery and Petrochemicals posted 33% growth in sales in the March quarter and its operating profit was down 71% in the same period. The decline in performance was due to lower refining margin ($5.25 per barrel in March 2010 quarter compared to $7.54 in March 2009 quarter), stronger rupee and low throughput.

Increasing sales are an indication of firm domestic demand for petroleum products while global demand for petroleum products is still to recover. Operating profit will not rise unless refining margin improves. Indian Oil posted an average GRM of $3.43/barrel in the March quarter compared to $4.48/barrel in the March 2009 quarter. Average GRM of HPCL refineries was $ 3.22/barrel this quarter compared to $ 9.52/barrel in the March 2009 quarter. RIL posted a lower GRM of $7.5/barrel compared to $9.9/barrel over the year-ago period. Chennai Petroleum also recorded a lower GRM ($4.27/barrel) compared to $6.6/barrel over the year-ago period.

Decline in GRM is because of softening in the global demand for petroleum products as US demand for gasoline declined by 0.5% year-over-year in 2009 and is averaging 1.2% below 2009 levels till April this year. Reduction in product spread especially in light and middle distillates has also narrowed down the refining margin. Low crude price differential is also eroding the GRM. With the margin between light and heavy crude narrowing, there has been little reward for the complex refineries to process the heavy sour crude, further affecting their GRM.

 

 

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After restructuring, LG Balakrishnan is on a faster growth path

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After restructuring, LG Balakrishnan is on a faster growth path

LG Balakrishnan & Brothers (LGBB) is another value stock. It manufactures metal forming (fine blanking, forging, machined components and wire drawing) and transmission products such as chains, sprockets, tensioners and belts. The company has five chain manufacturing plants. In an industry known for long linkages between different intermediate manufacturers, LGBB manufactures everything in-house, including steel rolling and tooling. Chains are precision components and require high-quality manufacturing. Its tools division is equipped with sophisticated CNC-wire cutting, spark erosion and micron CNC boring machines. The manufacturing is, thus, vertically integrated. It has both automotive and industrial chain segments. In the automotive chain segment, it has products like motor cycle and moped drive chains, timing chains and automotive kits. In the industrial segment, it has simplex, duplex and triplex roller chains, leaf chains, carding machinery chain for textile mills, roller chains with attachment and extended pin chains.  

In the automotive chain segment, it is the market leader with 65% market share of the OEM chain segment and 50% market share in the replacement segment.

In the metal forming segment, it is the largest fine blanking player serving the auto industry. Fine blanking is necessary to manufacture high-quality components with better flatness, surface finish and better dimensional tolerances. Its client list in this segment includes Bajaj Auto, Brakes India, Hero Honda, Kalyani Brakes, Larsen & Toubro, Bosch and TVS Motors. In the process of restructuring, it has transferred its industrial chains division, including the manufacturing plant, to Renold Chain India Private Limited for a consideration of Rs57.58 crore. It also has set up a joint-venture company, namely, Renold Chain India Private Limited, under the shareholders’ agreement with Renold Plc, a UK-based company, to manufacture industrial chains. With this restructuring, it has become a pure auto-ancillary company.

In the March 2010 quarter, the metal-forming division contributed 21% and the transmission segment contributed 63% of its revenues. Revenue in the metal-forming business grew 73%, to Rs33.2 crore, in the March quarter over the year-ago period; sales of transmission products grew 14%, to Rs99 crore, in the same period. Bajaj Auto is a major customer of LGBB. In April 2010, Bajaj Auto posted record sales of 313,000 vehicles, a surge of 85% over the year-ago period. This is good news for LGBB. Huge growth in operating profit in the March quarter (154%) has been because of the low-base effect. Its margin is 12%. The market-cap is 0.34 and 2.86 times its sales and operating profit, respectively. Good value at the current price. 

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