Business Today

In Full Flow

S Varadarajan, who rose up the ranks from a junior officer to head one of India's leading oil marketing companies, will leave behind a well-oiled legacy when he retires next year.
twitter-logoNevin John | Print Edition: January 3, 2016
S Varadarajan CMD, BPCL (Photo: Rachit Goswami)

It was, as if, the entire universe conspired to help S Varadarajan fuel Bharat Petroleum Corporation's (BPCL) growth story. During his two years as Chairman and Managing Director, crude oil prices fell from $110 to $40 a barrel, diesel was deregulated and growth in two-wheeler sales pushed up petrol consumption. The effect of the deregulation of petrol prices in 2010 also helped his cause.

The fall in crude prices, helped halve the working capital requirements of BPCL to Rs 6,000 crore - 7,000 crore. Interest rates fell. The government's fuel subsidy burden came down to Rs 25,000 crore-30,000 crore from Rs 1.4 lakh crore. BPCL's share of subsidy stood at Rs 6,000 crore in LPG. The revival of the rural economy and the resultant rise in two-wheeler sales, which translated into 60-65 per cent of the market share, also helped increase petrol sales, says Varadarajan.

  • INCOME/ 3-YR CAGR: Rs 2,40,287 crore/ 4 per cent
  • OP. PROFIT/ 3-YR CAGR: Rs 8,315 crore/ 30 per cent
  • PAT/3-YR CAGR: Rs 5,085 crore/ 57 per cent
  • AVG MCAP/ 3-YR CAGR: Rs 46,336 crore/ 28 per cent
  • AVG MCAP (APR-SEPT 2015) YOY GROWTH: 48 per cent
  • ROE/ROCE: 24.4 per cent/ 21.3 per cent
  • CASH/DEBT: Rs 1,360 crore/ 13,098 crore
  • NET PROFIT MARGIN: 2.00 per cent

Standalone data, net of extraordinary income and expenses

The flipside of the crude-slip story, however, resulted in inventory losses for BPCL - crude bought at a higher price was sold at lower price. "We did make losses in the first half. During this period, we started planning our inventory well and stopped stocking excess crude. Since two of our refineries were located in coastal areas - Mumbai and Kochi - we have been able to plan it well. Subsequently, the losses have been minimised," he says.

The company's overseas borrowings have also helped BPCL to reduce its interest costs. "Because of the strength of our balance sheet, we have been able to borrow at a much cheaper rate. Additionally, the interest costs fell because of tighter working capital management," says Varadarajan. He has also dealt with currency fluctuation through an astute hedging strategy.

BPCL's refineries at Mumbai and Kochi, along with its subsidiary company Numaligarh Refinery (NRL) and joint venture company, Bharat Oman Refineries (BORL) at Bina in Madhya Pradesh, aggregated a throughput of 29.27 million tonne (MT) in 2014/15, comparison to 28.69 MT in the previous year. Its market sales grew to 34.95 MT from 34.31 MT. However, exports fell to 2.22 MT against 3.06 MT recorded a year earlier. Revenue from operations fell by 6.26 per cent to Rs 2,58,731 crore in 2014/15, while profit rose by 25.39 per cent to Rs 5,082 crore. After setting off the minority interest, the earnings per share stood at Rs 66.47, up from Rs 54.08.

SP Tulsian, an independent analyst, says decontrol of petrol and diesel prices have helped oil marketing companies. "The prompt cash flow has eased the working capital pressure. But they need to work on improving the gross refining margins (GRMs) to move ahead in a volatile market," he adds.

BPCL has posted better GRM among PSU oil marketing companies for the last 3-4 years because of its new capacities. Its GRM at the Mumbai refinery stood at $3.97 per barrel in 2014/15, compared to $3.95 in 2013/14. In contrast, GRM of Reliance Industries stood at $8.6. The improvement in GRM at BPCL's Mumbai refinery was because of higher distillate yield, better product mix and reduction in octroi incurrence.



  • Petrobras completes formation test in Brazil's Farfan area in Sergipe-Alagoas Basin, where BPCL has a stake
  • Recoverable natural gas from a block in Rovuma basin in Mozambique is pegged at 50-70 trillion cubic feet.
  • BPCL's subsidiary has 10 per cent stake in it
  • BPCL decided to diversify into petrochemicals at an estimated capital cost of Rs 4,588 crore
  • Gas discovery in Cauvery Basin by ONGC-BPRL consortium
  • Acquired additional stake in Petronet CCK, which owns Kochi-Karur petroleum pipeline, to make it a subsidiary
  • Formed joint venture with GAIL Gas for Haridwar City Gas Distribution Project

Bank borrowings decreased by almost 50 per cent to Rs 6,925 crore in the last financial year, while loans from the Oil Industry Development Board increased three times to Rs 1,049 crore. In 2014/15, the company set up a medium term note (MTN) programme to raise funds from international debt capital markets. The total capital expenditure incurred during the year amounted to Rs 8,494 crore.

Deven Choksey, Managing Director, KR Choksey Investment Managers, says the market finds value in BPCL's investments in upstream exploration and production (E&P), in addition to its mainstay refining. BPCL's market value stands at Rs 65,811 crore as on December 7, 2015. In comparison, Indian Oil Corporation is at Rs 1,04,086 crore, Hindustan Petroleum at Rs 28,409 crore, and Reliance Industries stood at Rs 3,08,909 crore.

Bharat PetroResources (BPRL), a wholly-owned subsidiary company of BPCL, has participating interest (PI) in 17 upstream exploration blocks - seven in India, six in Brazil and one each in Mozambique, Indonesia, Australia and East Timor. About 88 per cent of its total 24,375 sq km E&P area is in offshore. In Brazil, BPRL has a 50 per cent stake in IBV Brasil Petroleo, which currently holds PI ranging from 20 per cent to 40 per cent in offshore blocks. In Mozambique, it has PI of 10 per cent in a block, where US-major Anadarko is the operator. "Upstream has been a huge success for us. Of the discoveries under E&P, Mozambique has the potential to become the third largest gas find in the world and the assets in Brazil are sizable. In both place, the exploration phase is getting over and we are entering into the developmental phase. By 2020, the first gas is expected from Mozambique. Brazil will also start production around the same time," says Varadarajan. Products from Brazil will be sold in the local market, while gas from Mozambique will be sold to the far East - China, Japan, Korea, Malaysia and Indonesia.

BPCL is upgrading the quality of fuels to Euro 5 and Euro 6 standards, which is expected to hit the market by 2020
Varadarajan says economic growth has picked up in the last two quarters and petrol demand has risen in double digits for the past 18 months in line with growing vehicle population. Diesel growth, which was marginally negative last year, has, however, picked up in 2014/15 recording 4-5 per cent growth.

In the last 10 years, BPCL has moved ahead fast, overtaking HPCL. In the last three years, income and profit recorded compounded annual growth rate (CAGR) of 4 per cent and 57 per cent, respectively. CAGR of market capitalisation stood at 28 per cent. Its market cap also grew by 48 per cent during April -September 2015, while debt stood low at Rs 13,098 crore. It has a cash reserves of Rs 1,360 crore.

"The market value growth was because of a combination of factors. On the domestic front, the refining capacity was added fast in line with market demand, especially the expansions at the Mumbai and Kochi refineries. Additionally, the new refinery in Bina has also started operations from 2012," he says. The refinery at Kochi increased its annual capacity to nearly 9.5 MT, up from 6 MT about two years back. It is expected to go up to 15.5 MT next year. The capacity at the Mumbai refinery went up to 12 MTPA from 6 MTPA, while the Bina refinery has a capacity of 6 MT.

The company has an overall market share of 23 per cent, while its retail market share stood at 28 per cent. Consistency in performance of refineries has been a huge factor. The company's bottom line, which used to be Rs 1,500 crore to Rs 2,000 crore before 2013, increased to Rs 4,000 crore in 2013/14, before breaching the Rs 5,000 crore mark in 2014/15. In the first half of this fiscal, BPCL's profit went up to Rs 3,300 crore. With the rise in profits, the company's investments also increased to around Rs 10,000 crore in 2014/15 from the usual Rs 3,000 crore to Rs 4000 crore in previous fiscal.

BPCL plans to invest Rs 1 lakh crore in the next five years. "Upstream investment would be between Rs 20,000 crore and Rs 22,000 crore. At the refining front, Bina refinery will be first enhanced by 2 MT. In the second phase of expansion, the capacity will go up to 15 MT. In addition, we are getting into the petrochemical business," says Varadarajan.

BPCL is upgrading the quality of fuels to Euro 5 and Euro 6, which will hit the market by 2020. The company will invest to build infrastructure, pipelines and import terminals. About Rs 20,000 crore will be spent only for infrastructure in the next five years, as demand goes up in the hinterlands, says Varadarajan, adding that the company plans to improve its city network to ease domestic gas distribution, including putting up a 4,000 km pipeline along with GSPL, IOC and HPCL. "We are also in the process of growing the non-fuel revenues in a big way, especially by enhancing the In&Out stores attached to the retail outlets. The non-fuel business is just Rs 2,000 crore now, but the margins are good. More importantly, these facilities connect with the customers. In the next six months, we will become a more aggressive player in the category," adds Varadarajan.

According to the return on capital employed, BPCL is ahead of other PSUs OMCs. "In 2008/09, when government subsidies were high, they put a lot of systems in place in refining, logistics and marketing for improving efficiency. A combination of this gives the company differentiated profitability. In the last 10 years, BPCL has recorded CAGR of 17 per cent in market capitalisation as return to stakeholders," says a Mumbai-based analyst.

Varadarajan is with BPCL for the last 32 years and will be retiring in 2016. His journey from a junior officer at the company headquarters in Bharat Bhavan at Ballard Estate in Mumbai to head the organization has been rewarding. Despite being a chartered accountant by profession, he was exposed to different roles in the company, including heading its corporate strategy and working as a marketing manager in Chennai. If BPCL helped Varadarajan grow, he made sure to return the favour.

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