BPCL -Higher subsidy neutralizes gains from higher GRM:: BofA Merrill Lynch,

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BPCL
   
Higher subsidy neutralizes
gains from higher GRM
„FY11 recurring profit down 15% as subsidy jumps; Neutral
BPCL’s FY11 consolidated recurring profit at Rs20bn (EPS: Rs55.1) is down 15%
YoY despite higher refining margin (GRM). BPCL was hit by sharply YoY higher
subsidy and lower inventory gain. BPCL’s FY11 consolidated reported profit is flat
YoY. BPCL’s FY11 as well as FY10 reported profit included one-time expenses or
provisions. We have kept FY12 EPS unchanged. We retain Neutral on BPCL.
Higher subsidy neutralizes gain from higher GRM
BPCL's FY11 GRM is up 50% YoY at US$4.5/bbl (4Q GRM at US$6.9/bbl is up
2x). The jump in GRM is in line with recovery in Singapore GRM. However,
sharply higher subsidy and lower inventory gains more than neutralized the gains
from higher GRM. Net subsidy on LPG, kerosene and diesel borne by BPCL in
FY11 is up 28% (Rs3.5bn) YoY at Rs15.9bn. R&M companies had to bear 8.8%
of FY11 subsidy with government bearing 52.4% and upstream 38.7%. However,
R&M companies had to also bear the entire petrol subsidy from July 2010, which
we estimate at over Rs40bn. BPCL‘s share in petrol subsidy is estimated at over
Rs11bn since July 2010. If upstream compensated 33.3% of FY11 subsidy
instead of 38.7%, BPCL’s FY11 recurring EPS would have been 45% YoY lower
at Rs34.2 (EPS lower in FY06 and FY09).
FY12 EPS kept unchanged (down 3% YoY)
We have kept BPCL’s FY12E EPS of Rs53.5 implying 3% YoY decline
unchanged. As in every year, subsidy sharing will be a key determinant of FY12E
earnings.