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3QFY11 results
BPCL reported net profit of Rs1.9bn in 3Q –below our estimate due to lower than
expected inventory gains and a prior period tax write off. BPCL has met only 44%
of our full year estimate implying that 4Q profits would be dependent on increase
in government support from 45% in 9MFY11 to 60% of under-recoveries for full
year. This is uncertain as is the possibility of any policy change or diesel price hike
while fundamental headwinds from rising crude and single digit return ratios
persist. In this context, BPCL’s 1.5x Mar10 PB is rich; notwithstanding its E&P
footprint. We revise our rating to UPF after the recent stock price correction.
3QFY11 profits at Rs1.9bn – below estimate
BPCL reported Rs1.87bn (-51%YoY) in net profits in 3QFY11 – below our estimate.
Core operating performance was helped by better than expected GRMs (US$4.4/bbl,
+US$1.9/bbl QoQ) even as thruput in its Mumbai refinery came below estimate as one
of its CDU was shutdown for 40 days. Marketing volumes also came in slightly below
our estimate. Most importantly, lower than expected product inventory gains (Rs3bn)
and a prior period tax write off (Rs1bn) pulled profits below our estimate.
9M earnings of Rs16.9/sh = 44% of our below consensus FY11 estimate
BPCL’s gross under-recovery for 9M stood at Rs106bn but Rs47.6bn (45%) in
government support allowed it to report a net profit of Rs6.1bn (Rs16.9/sh, 44% of
our FY11 estimate). We model in 6.7% (Rs10.5bn) net under-recoveries for BPCL in
FY11 cf. 12% (Rs12.6bn) in FY10. While it has already borne net under-recoveries of
Rs23bn (22%) in 9M, government support would need to increase disproportionately
and reach 60% for full year to meet our below consensus FY11 estimate.
Little clarity on pricing policy and subsidy framework
The framework and quantum of government support will remain uncertain till May-11,
in our view, implying little earnings predictability. With crude nudging US$100/bbl and
five state elections scheduled by mid-2011, reforms (especially diesel deregulation)
will also be difficult to accomplish. Further, while government support is accounted in
earnings, BPCL receives cash after 2-6 months post parliamentary approval putting
pressure on cashflow exacerbated by an increase in w-cap on higher crude prices.
Subdued ROEs, 1.5x Mar10 PB; U-PF with a Rs650/sh target
Our recent management meetings indicate that BPCL is charting further refinery
expansion projects at Bina and Kochi. We see little respite for return ratios from the
current single digit levels, therefore, and find its 1.5x Mar10 PB rich; its E&P footprint
(we value at Rs100/sh) notwithstanding. After its recent 20% correction in the last 3
months, we revise our rating on the stock from SELL to U-PF with a target price of
Rs650/share. With BPCL likely to drill 20 wells in 2011, upstream newsflow may
intensify but we note that it continues to trade above its historical average P/book.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
3QFY11 results
BPCL reported net profit of Rs1.9bn in 3Q –below our estimate due to lower than
expected inventory gains and a prior period tax write off. BPCL has met only 44%
of our full year estimate implying that 4Q profits would be dependent on increase
in government support from 45% in 9MFY11 to 60% of under-recoveries for full
year. This is uncertain as is the possibility of any policy change or diesel price hike
while fundamental headwinds from rising crude and single digit return ratios
persist. In this context, BPCL’s 1.5x Mar10 PB is rich; notwithstanding its E&P
footprint. We revise our rating to UPF after the recent stock price correction.
3QFY11 profits at Rs1.9bn – below estimate
BPCL reported Rs1.87bn (-51%YoY) in net profits in 3QFY11 – below our estimate.
Core operating performance was helped by better than expected GRMs (US$4.4/bbl,
+US$1.9/bbl QoQ) even as thruput in its Mumbai refinery came below estimate as one
of its CDU was shutdown for 40 days. Marketing volumes also came in slightly below
our estimate. Most importantly, lower than expected product inventory gains (Rs3bn)
and a prior period tax write off (Rs1bn) pulled profits below our estimate.
9M earnings of Rs16.9/sh = 44% of our below consensus FY11 estimate
BPCL’s gross under-recovery for 9M stood at Rs106bn but Rs47.6bn (45%) in
government support allowed it to report a net profit of Rs6.1bn (Rs16.9/sh, 44% of
our FY11 estimate). We model in 6.7% (Rs10.5bn) net under-recoveries for BPCL in
FY11 cf. 12% (Rs12.6bn) in FY10. While it has already borne net under-recoveries of
Rs23bn (22%) in 9M, government support would need to increase disproportionately
and reach 60% for full year to meet our below consensus FY11 estimate.
Little clarity on pricing policy and subsidy framework
The framework and quantum of government support will remain uncertain till May-11,
in our view, implying little earnings predictability. With crude nudging US$100/bbl and
five state elections scheduled by mid-2011, reforms (especially diesel deregulation)
will also be difficult to accomplish. Further, while government support is accounted in
earnings, BPCL receives cash after 2-6 months post parliamentary approval putting
pressure on cashflow exacerbated by an increase in w-cap on higher crude prices.
Subdued ROEs, 1.5x Mar10 PB; U-PF with a Rs650/sh target
Our recent management meetings indicate that BPCL is charting further refinery
expansion projects at Bina and Kochi. We see little respite for return ratios from the
current single digit levels, therefore, and find its 1.5x Mar10 PB rich; its E&P footprint
(we value at Rs100/sh) notwithstanding. After its recent 20% correction in the last 3
months, we revise our rating on the stock from SELL to U-PF with a target price of
Rs650/share. With BPCL likely to drill 20 wells in 2011, upstream newsflow may
intensify but we note that it continues to trade above its historical average P/book.
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