Time to cash in…BPCL the best pick: Macquarie

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Bharat Petroleum
Time to cash in…BPCL the best pick
Event
􀂃 BPCL reversed its Q1FY11 losses by announcing a PAT of Rs 21.4bn, due to
allocation of Govt cash subsidy of Rs29bn. We reiterate Outperform on BPCL,
maintain our TP of Rs909, and recommend a switch from HPCL/IOCL.


Impact
􀂃 Full impact of price increases limits BPCL under-recoveries to Rs 25bn:
Despite the rupee-denominated crude price remaining almost constant QoQ,
the deregulation of gasoline (reflected through multiple price realignments),
and price hikes for diesel, kerosene and LPG done halfway through the last
quarter have slashed industry under-recoveries for the quarter to Rs112bn (vs
Rs 201bn in Q1). BPCL’s revenue losses for Q1 stood at Rs 25bn.

􀂃 Oil Marketing Cos (OMCs) get Rs 130bn (Rs 29.5bn to BPCL) cash from
GoI: The Finance ministry allocated for H1FY11 cash reimbursements of Rs
100bn, and recently a further Rs30bn (totalling ~42% of under-recoveries of
Rs312bn), vs. the demand for Rs150bn (~50%) by the Oil ministry. Upstream
companies continued to share 33% of the total, bearing Rs37.6bn for Q2FY11
Thus, BPCL’s net burden for the half year is Rs17bn (25% of revenue losses)

􀂃 GRMs of US$2.81/bbl disappointed slightly; Sales growth of ~15% YoY:
Inventory losses on crude dragged back GRMs to US$2.8/bbl, a QoQ decline
of 21%; however, spurting auto-fuel cracks augur well for the upcoming
quarters. Marketing sales showed strong growth of 15% YoY, led by demand
growth in auto fuels. Further, strong inventory gains on marketed products
(due to price hikes last quarter) more than offset the lower GRMs.

􀂃 Diesel deregulation inevitable, but is held back by rise in crude prices:
The promised deregulation of diesel prices has currently taken a backseat
due to the recent sharp rise in crude prices, which has increased diesel
under-recoveries to Rs2-2.5/litre. However, we believe that deregulating
diesel is a necessity for the Govt as it cannot support such levels of subsidy
for a fuel that is growing at 8% YoY on a demand base of 71bn litres pa (45%
of sales). A desire for success of public offers for oil PSUs (ONGC, IOCL)
slated next year is a possible catalyst for this politically sensitive issue.

Earnings and target price revision
􀂃 No significant change in earnings. No change in Target price of Rs 909/sh.
Price catalyst
􀂃 12-month price target: Rs909.00 based on a Sum of Parts methodology.
􀂃 Catalyst: Commissioning of Bina refinery; Diesel deregulation/price hike

Action and recommendation
􀂃 BPCL remains our pick amongst the trio of OMCs (BPCL, IOCL, HPCL):
Its better marketing efficiency (15-40% higher throughput per outlet) and
upcoming high-complexity Bina refinery gives it an advantage over peers.
Large upstream finds in Brazil and Mozambique conservatively valued at
Rs100/sh, and recently in Indonesia (all in partnership with Anadarko), make it
stand out from the pack.