BPCL: Results ahead of estimates - ACCUMULATE -Target Rs 671:: Emkay

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Bharat Petroleum Corporation Ltd.

Results ahead of estimates

ACCUMULATE

CMP: Rs 584                                       Target Price: Rs 671

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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.7.5bn, against Rs.6.4bn, mainly due to issuance of oil bonds/cash receivables from the government of India

n     Average gross refining margin for 9mths FY11 was at $3.63/bbl as compared to $2.7/bbl (increase of 34% YoY)

n     Valuations look attractive at 1.1x FY12E ABV, mainly due to recent change in reforms, Continue ACCUMULATE rating with TP of Rs.671

Highlights of the results

BPCL reported results which were above our estimates at EBIDTA and PAT Level,

primarily due to issuance of oil bonds/cash pay out by the government during the

quarter. Revenue for the quarter was at Rs. 367bn (against our expectation of

Rs.372bn), growth of 14% YoY, mainly on account of cash compensation received from

the government of Rs.18.1bn. EBIDTA during the quarter was at Rs.7.5bn, against of

Rs.6.4bn, Growth of 16%, YoY. During the quarter Inventory loss were at Rs.8.3bn as

compared to Rs.7.5bn a year ago. Interest cost increased by 9% to Rs.2.7bn. During

the quarter the company reported net profit of Rs.1.8bn, against Rs.3.7bn YoY.

The company received upstream discount of Rs.11.8bn, in respect of crude

Oil/LPG/SKO purchased from them has been accounted during the quarter. The

company has received budgetary support of Rs.18.1bn 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.

Interest cost increased by 9% to Rs.2.7bn

During the quarter, interest costs increased by 9% to Rs.2.7bn compare to Rs.2.5bn on

YoY basis.

GRM was at $4.6 per bbl as against $2.8 per bbl on QoQ

Higher product demand, especially in light distillate, has seen product spreads

increasing in Q3FY11. Gross refining margin was at $4.6/bbl as compared to $2.8/bbl

(Growth of 64% QoQ). We expect GRM’s to improve further in the coming quarters, in

tandem with the improvement in the global economy, which will improve the petro

product spreads.

Valuations

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. 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. Also lower contribution from the government during the quarter

has raised concern for Q4 FY11 contribution as well. Hence, we have downgraded our

target multiple from 1.6x to 1.3x for FY12E P/BV and reduced our target price to Rs.671

(Rs.805, earlier), however maintains our ACCUMULATE rating on the stock