BPCL- Price factoring diesel de-regulation; SELL: Anand Rathi

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Bharat Petroleum Corp.
Price factoring diesel de-regulation; downgrade to Sell
 Government to the rescue. Bharat Petroleum Corporation (BPCL)
reported 2QFY11 net profit of `21.4bn, lower than our estimates,
thanks to last-minute compensation from the government for
1HFY11 under-recoveries. Despite small changes in earnings, we
downgrade the stock to Sell on valuation grounds. The recent run-up
is factoring in a 70% probability of diesel de-regulation ahead of the
ONGC-IOC divestment that, we believe, is not feasible in the present
high-inflationary scenario.


 Refining margin disappoints. BPCL’s GRM declined to US$2.8/bbl
in 2Q (US$3.6 in 1Q), though the Singapore-Dubai GRM was up
US$0.5/bbl qoq at US$4.2/bbl in 2Q. While we expect refining margins
to achieve mid-cycle level in FY12-13, we believe they will be subdued in
the next 6-12 months.

 Uncertainty in subsidy-sharing continues. OMCs bore 26% of
1H under-recoveries, significantly higher than we expected. Awaiting
clarity, we maintain that ~10% of under-recoveries would be parked
in oil marketing companies (OMCs).

 Earnings. We maintain our FY12 earnings estimate but trim our
FY11 estimates by 5%, factoring in the delay in commissioning of the
Bina refinery. We also introduce FY13 estimates.

 Valuation and risks. We downgrade the stock to Sell from Hold on
valuation grounds as we believe the recent run-up is factoring in
unjustified optimism of diesel de-regulation. We raise our target price to
`695 from `595 based on: i) PE of 10x (from 9.6x) FY12e EPS, ii)
greater value of investments and iii) potential E&P upside. Risks:
Favorable decision on diesel de-regulation or subsidy sharing, significant
E&P discovery, stronger refining margins, lower crude prices.