BPCL- Government compensation key to FY11 earnings outlook: BofA ML

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BPCL
Government compensation key
to FY11 earnings outlook

􀂄 Strong profit in 2Q, but 1H profit weak; Neutral
Bharat Petroleum (BPCL) reported a strong profit of Rs21.4bn (EPS: Rs59.3) in
2Q FY11. The strong 2Q profit is due to the fact that BPCL accounted for the
entire government compensation for 1H in the 2Q. 2Q compensation from the
government and upstream, therefore, exceeded the 2Q subsidy and, hence, the
strong EPS. However, BPCL’s 1H profit is just Rs4.2bn (EPS: Rs11.7). This is
because government compensation is only 41% of the 1H subsidy, as against
petroleum ministry guidance of compensation being 50-67% of the FY11E
subsidy. BPCL’s 1H EPS would have been highe,r at Rs23.2-45.5, if the
government had compensated 50-67% of the 1H subsidy. Thus, the key to
BPCL’s FY11E earnings outlook is whether the government indeed compensates
50-67% of the FY11E subsidy. We retain our Neutral rating on BPCL.


Government reimburses 41% of 1H subsidy; strong 2Q
In 2Q, BPCL’s gross subsidy was Rs24.6bn. However, it received Rs37.7bn of
compensation from upstream (33.3% of the 2Q subsidy, at Rs8.2bn) and the
government (41.5% of the 1H subsidy, at Rs29.5bn). Thus, its 2Q compensation
exceeded the 2Q subsidy by Rs13.1bn. BPCL consequently reported strong EPS
of Rs59.3 in 2Q. However, BPCL was compensated only 75% of 1H subsidy of
Rs71bn and it has borne a net subsidy of Rs17.9bn. Its 1H EPS is, therefore, just
Rs11.7.

1H EPS Rs23-45 if government compensated 50-67% subsidy

Upstream companies have reimbursed one-third and the government another
41% of BPCL’s 1H subsidy. However, the petroleum secretary had indicated in
July 2010 that the government would compensate 50-67% of FY11E subsidy.
Thus, government compensation in 1H, at 41%, is lower than 50-67% likely in
FY11E. BPCL’s 1H EPS would have been Rs23.2 if the government had
compensated 50% of 1H subsidy and Rs45.5 if 67% of the 1H subsidy was
compensated. Our FY11E EPS estimate is Rs51.4, assuming the government
compensates 58% of the subsidy.