BPCL- Bullish outlook on crude leads to muted prospects– Edelweiss

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BHARAT PETROLEUM CORPORATION
Bullish outlook on crude leads to muted prospects


􀂄 Throughput at 5.6 mmt; Q2FY11 blended GRM at USD 2.9/bbl
Bharat Petroleum Corporation (BPCL) reported refining throughput at 5.6 mmt in
Q2FY11, flat Q-o-Q but up 12% Y-o-Y. Mumbai refinery’s throughput jumped 9.9%
Y-o-Y (due to resumption of Mumbai refinery CDU during Q1FY10), while that of
the Kochi refinery was 15.6% higher Y-o-Y (undergoing expansion during
Q1FY10). Quarterly blended GRMs, at USD 2.9/bbl (down 19.9% Q-o-Q and 25.5%
Y-o-Y), were lower than our estimate of USD 3.15/bbl. Blended GRM in Q2FY11 for
the Mumbai refinery was pegged at USD 3.35/bbl (up 19.6% Y-o-Y, down 5.3% Yo-
Y) while for Kochi it was USD 2.1/bbl (down 42.7% Q-o-Q and 62.7% Y-o-Y).


􀂄 Subsidy sharing by GoI leads to over-recovery; marketing sales lower
BPCL’s marketing gross under-recoveries for the quarter were at INR 24.6 bn. The
government provided a subsidy of INR 29.5 bn as partial compensation for H1FY11
while its also received upstream discounts of INR 8.21 bn from ONGC and GAIL
(equal to 33.3% of gross under-recoveries in Q2FY11). The company thus had a
net over-recovery of INR 13.1 bn in Q2FY11 with the cumulative net underrecovery
in H1FY11 at INR 17.9 bn. With the provision of government subsidy,
BPCL reported PAT of INR 21.42 bn for Q2FY11. This compares with a loss of INR
17.2 bn in Q1FY11 and INR 1.6 bn in Q2FY10 due to zero subsidy sharing by GoI.
Domestic marketing sales for Q2FY11, at 5.8 mmt, dipped 14.8% Q-o-Q and 4.8%
Y-o-Y due to the impact of heavy monsoons. Marketing sales declined (Y-o-Y)
primarily due to lower demand from domestic fuels segment with diesel LPG (700
TMT) and SKO (359 TMT) retail sales dipping 10.8% and 6.2% Y-o-Y, respectively

􀂄 Outlook and valuations: Bullish on crude; maintain ‘REDUCE’
Our muted outlook on BPCL continues based on our bullish stance on crude prices
and uncertainty regarding diesel de-regulation. While upstream remains the longterm
bet with E&P upsides acting as a trigger for the stock, BPCL’s earnings will
continue to be driven by earnings from marketing and refining segments. We are
rolling forward our valuations to March 2012 from March 2011 earlier and have
revised our SOTP to INR 709/share.

We have cut SOTP by 9% (from INR 779 for
March 2011) as we believe the company’s incremental earnings from marketing
may get capped due to a run up of crude prices resulting in higher underrecoveries.
We also continue with our belief that diesel de-regulation may not
happen in the near term due to upcoming assembly elections in certain key states.
Hence, in the uncertain environment, we maintain our ‘REDUCE/Sector
Underperformer’ recommendation/rating on the stock. At INR 756, BPCL is
trading at 10.0x and 7.3x our FY11E and FY12E EV/EBITDA, respectively.