The slowdown happened by March 10 itself, but we could not stop the crude oil contracts that had already sailed after the lockdown was announced.

State-run oil refiner-cum-marketer BPCL suffered both high inventory and forex losses in Q4FY20 amid a gloomy demand scenario. While the lockdown hit sales hard in April, there has been a steady improvement in demand for auto fuels since early May. N Vijayagopal, director-finance at BPCL, told Vikas Srivastava the company expects sales to reach normal levels by July, with the progressive easing of the lockdown. Excerpts:

Was the inventory loss for Q4FY20 an impact of 6-7 days’ lockdown or was it already in the making?

Our industry has a certain working capital cycle. We have to contract for buying crude oil, that has to be voyaged for 7-21 days depending on the destinations. The crude has to be stored, processed and converted to products and transported to terminals and various places across the country. So it is an almost two-and a-half months’ working capital cycle.

The slowdown happened by March 10 itself, but we could not stop the crude oil contracts that had already sailed after the lockdown was announced. We managed to defer and cancel some of them and transferred a portion of the crude sourced to the Government of India’s strategic reserve, for which it paid subsequently.

The volume of inventory was abnormally high this time due to subsequent drop in demand. Our sales had dropped to one-third of the average monthly sales in April, and roughly half of the average sales in May. So all these inventories had to be valued at the price at which we were actually selling in the month of April and May. The crude and product prices collapsed leading to drastic reduction in the differentials between the crude and the product prices. We had to recognise the value of all this huge inventory as if we were to sell in the month of April and May; we had to do it till the second quartet of May.

The inventory losses in the January-March quarter of 2020 was Rs 1,937 crore, as against a gain of Rs 272 crore a year ago. Similarly, the US dollar that was steady at the Rs 70-72 range till February-end collapsed in March, which resulted in a forex loss of Rs 1,211 crore in the fourth quarter. So these two alone — inventory and forex losses — resulted in over Rs 3,000-crore loss. On the refinery side, the drop in product spreads and the crude prices resulted into an abysmally low gross refining margins of $0.75/bbl for the January-March quarter of 2020, while for the FY20 it was $2.5/bbl. However, despite all the challenges, we have done well to have over Rs 2,000 crore net profit in FY20, though our estimation before the Covid-19 spread was full-year net profit of over Rs 7,500 crore.

What is the exceptional item of Rs 1,310 crore shown in Q4FY20?

The exceptional item is part of the inventory losses. We generally write down or reduce the prices with the cost, when the prices are reduced to the net realisation value (NRV), up to that limit it is generally considered as part of the normal expenditure. Any further reduction has to be shown as an exceptional item as per the accounting standard. Around Rs 600 crore of the Rs 1,937 crore inventory loss is an exceptional item. Besides revaluation of Rs 400 crore on the refinery side is also shown as an exceptional item. Any reduction in crude price beyond the cost to the net realisation value is considered as an exceptional item. Around Rs 1,081 crore was the difference between the cost and the NRV.

How do you see the product pricing in Q1FY21?

It mostly depends on demand and supply in the global market. The gross refining margins (GRMs) and cracks were poor in Q4FY20, but today we are seeing negative cracks for petrol and diesel. They are very low in the range of $3-$4/ bbl for diesel, which used to be $16/bbl and at least $8-10/ bbl for Petrol, so the crack spreads are extremely low. But as we end this quarter we don’t expect this kind of inventory loss. So unless something untoward happens we expect our Q1FY20 to be directionally better than Q4FY20.

How do you see the sales for Q1FY20?

The sales have already improved month-on-month. It was around one-third of normal sales in April compared to average of April 2019. It improved to 50% of sales in May 2019, and now we are at 70-72% of normal sales in June as compared to June of 2019. If things continue to improve like this, we expect the sales to reach the normal level by July.

Which segments have shown growth in sales for BPCL?

Our major products are diesel and petrol, which are mainly transport fuel and have seen improvement due to opening up of railways, inter-state movements and movement of trucks. Although industrial sales, which constitutes 18% of total sales, is still not happening. The third product, LPG mostly a cooking fuel, has seen huge demand due to focus by the government on the Ujjwala scheme.

How much crude inventory have you built to benefit from the drop in crude prices?

We do not look at drop in crude price as a trading opportunity. But we have contracted for crude in excess of our reduced demand. So we have made benefit of reduced cost regime to the extent our policy permits and liquidity allows. Normally, we maintain a crude inventory of 1 million tonne (mt). At the end of April we had an inventory of 1.5 mt. Additionally, we supplied around 0.5 mt to the government’s strategic reserves. It was a parcel we got from Saudi Arabia since we did not want to renege on the contract we supplied it to the government and we have been paid for that.

How much discount has been offered on the already lower crude prices and how did it help BPCL?

There was a discount for a brief period when the demand behaved very funny and suppliers had no choice but to offer discount to sell their products. But any amount of discount was not sufficient to generate decent margins because we were operating at only 36% of our capacity; also the crack spreads were very low to derive any benefits.

Do we see inventory gains in Q1FY21 due to higher built up of inventory now?

Crude is not revalued again. We only take into account the reduction in value, we do not recognise the upward movement, since we do not get inventory gains by revaluing the inventory as potential gains. We are not permitted to do that.