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Bharat Petroleum Corp. Ltd |
Times are getting better |
ACCUMULATE
CMP: Rs 756 Target Price: Rs 805
n BPCL reported results which were above our estimates at EBIDTA and PAT Level, primarily due to issuance of oil bonds/Cash receivables during the quarter
n EBIDTA at Rs.24.8bn, against EBIDTA loss of Rs0.9bn, mainly due to issuance of oil bonds/cash receivables from the government of India
n Average gross refining margin for 1H FY11 was at $3.19/bbl as compared to $3.53/bbl (decline of 10% YoY) below our expectation of $3.7/bbl
n Valuations look attractive at 1.4x FY12E ABV, mainly due to recent change in reforms, Accumulate rating with TP of Rs.805
Highlights of the results
BPCL reported results which were above our estimates at EBIDTA and PAT Level,
primarily due to Inventory gain and issuance of oil bonds/cash pay out by the
government during the quarter. Revenue for the quarter was at Rs. 354bn (against our
expectation of Rs.318bn), growth of 31%, mainly on account of higher throughput and
cash compensation received by the government of Rs.29.4bn. EBIDTA during the
quarter was at Rs.24.8bn, against EBIDTA loss of 0.9bn a year ago. During the quarter
Inventory gain were at Rs.21bn as compared to inventory gain of Rs.3.2bn in Q1FY11.
Interest cost increased by 4% to Rs.2.7bn. During the quarter the company reported net
profit of Rs.21.4bn, against net loss of 1.6bn, mainly due to issuance of oil bonds/cash
receivables by the government.
The company received upstream discount of Rs. 8.2bn, in respect of crude
Oil/LPG/SKO purchased from them has been accounted during the quarter. The
company has received budgetary support of Rs.29.4bn from the GOI for the underrecovery
of cooking fuel and auto fuel during the quarter.
Better clarity on subsidy sharing mechanism
After years of ad-hoc subsidy arrangements, a proper subsidy sharing mechanism is
being worked out. The Oil secretary S Sudarshan has clarified that the 1/3rd of the
under recovery would be absorbed by the upstream companies, the government would
certainly absorb 50% or more, the balance 17% would be based on the companies
performance over the quarter.
Marginal increase in Interest cost
During the quarter, interest costs increased by 4% to Rs.2.7bn compare to Rs.2.6bn on
YoY basis.
Average GRM was at $2.8 per bbl as against $3.57 per bbl on QoQ
Lower product demand, especially in light distillate, has seen product spreads reducing
in Q2FY11. During the quarter average gross refining margin was at $2.8/bbl as
compared to $3.57/bbl (declined by 21% QoQ). However, we expect GRM’s to improve
in the coming quarters, in tandem with the improvement in the global economy, which
helps to improve the petro product spreads.
Valuations
Though in the last few years, OMC’s have been de-rated due to rising crude oil price and
lack of policy initiatives from the government. Historic evidence suggests that OMC’s have
been re-rated on expectations of policy initiatives, despite increase in the crude oil prices.
We note that in FY03-04, OMC’s P/BV increased from 1.2-1.3x to 2x despite crude prices
increasing from US$30/bbl to US$40/bbl. With the new reform, scenario has changed with
better clarity in policy. Currently OMC’s are trading in the range of 1-1.4x FY12 BV and we
believe it to command higher multiple (20% premium, compared to current level of 1.2-1.4x)
backed by A) the expected implementation of diesel deregulation over next 6-8months B)
Better clarity on sharing mechanism (upstream companies sharing entire 1/3rd of the total
under recovery) C) Expectation of increase in either diesel and petrol prices or change in
duty structure by the GOI (backed by higher crude prices to reduce the under recovery) D)
Improvement in the earnings due to deregulation. However, pressure on the US dollar has
been diverting interest of investors towards commodities including crude oil. If US dollar
continues to remain under pressure, the commodities are likely to stay firm including crude
oil, hurting the OMC’s performance.
Though there has been some clarity on sharing mechanism more budgetary support from
GOI is needed to keep BPCL in black. We expect GOI’s budgetary support to increase only
if it is able to garner larger funds from disinvestment or by full implementation of Kirit Parekh
committee recommendation. Possible stock triggers for BPCL in the long term include IPO
listing for Bina Refinery (expected in FY12) and exploration upsides from upstream assets.
At CMP of Rs.756, the stock trades at 1.6x and 1.4x FY11E and FY12E P/BV. We have
upgraded our target multiple from 1.4x to 1.6x for FY12E P/BV and upgrade our target price
to Rs.805 (Rs.675, earlier), based on the above mention rationale. Despite of higher
valuation, we cut our rating on the stock from BUY to ACCUMULATE due to limited upside.
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