BPCL- Good results boosted by cash bounty.: Kotak Sec

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Bharat Petroleum (BPCL)
Energy
Good results boosted by cash bounty. BPCL reported better-than-expected 2QFY11
net income at `21.4 bn versus our estimate of -`3.6 bn due to compensation of `29.5
bn from the government for 1HFY11 versus nil assumed by us. We maintain our BUY
rating with a revised target price of `860 (`855 previously). We see (1) government
action on diesel deregulation and subsidy-sharing and (2) positive news flow from E&P
operations as key triggers for the stock. Key downside risk stems from higher-thanexpected
under-recoveries.





Compensation from government boosts earnings
BPCL reported 2QFY11 EBITDA at `24.9 bn versus -`14.1 bn in 1QFY11 and -`950 mn in 2QFY10;
our estimate was at -`4.7 bn. The stronger-than-expected performance was due to compensation
of `29.5 bn from the government for 1HFY11 versus nil assumed by us. We note that BPCL has
borne `17.9 bn as net under-recovery in 1HFY11. However, we would not extrapolate the subsidysharing
arrangement for 1HFY11 to estimate FY2011E earnings as the final subsidy-sharing
arrangement will not be known until 4QFY11 results.

Refining margins decline; sales volumes increased 1.5% yoy
BPCL’s 2QFY11 refining margin was US$2.8/bbl versus US$3.6/bbl in 1QFY11 and US$3.9/bbl in
2QFY10. The qoq decline in margins was surprising given improvement in global refining margins.
The management highlighted that the margins were impacted due to shutdown at Kochi refinery
in 2QFY11. 2QFY11 sales volumes (domestic) increased 1.5% yoy to 6.6 mn tons. The modest yoy
growth in sales despite strong growth in gasoline sales reflects (1) modest growth in diesel sales
and (2) decline in sales of bitumen, fuel oil and naphtha.

Valuation attractive; stock performance will depend on (1) crude prices and (2) government action
Our revised target price is `860 (`855 previously) based on 11X FY2012E adjusted EPS (10X
previously) plus value of investments. We justify a higher multiple based on (1) the market’s (15.3X
FY2012E ‘EPS’) and peers’ higher valuations and (2) higher under-recoveries, which results in more
conservative earnings. Near-term stock performance will depend on (1) crude oil prices, (2)
government’s willingness and ability to deregulate diesel prices at current high level of crude prices
and (3) subsidy-sharing mechanism formulated by the government. We expect the government to
provide some clarity on these issues in light of the proposed disinvestment in IOCL and ONGC.

BPCL’s E&P portfolio shaping up well
We are impressed by the slew of discoveries announced by BPCL over the past 12 months.
Although the company has not yet disclosed the reserves in these blocks the value of the E&P
portfolio could be meaningful in the context of BPCL’s current market capitalization of US$6.2 bn.