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Bharat Petroleum (BPCL)
Energy
Upstream contribution and strong refining margins boost earnings. BPCL
reported strong 4QFY11 net income at `9.4 bn (+220% qoq and -25% yoy) versus our
estimate of `8.3 bn led by (1) higher discounts received from upstream companies and
(2) strong refining margins at US$6.9/bbl (helped by adventitious gains). However,
results were impacted by high employee costs at `12.4 bn (+118% qoq and 62% yoy).
BPCL reported healthy EPS of `45.7 for FY2011. We maintain our ADD rating on BPCL
given 17% potential upside to our revised target price of `735 (`740 previously).
Strong earnings given (1) higher discounts from upstream and (2) good refining margins
BPCL reported 4QFY11 EBITDA at `16.6 bn versus `7.5 bn in 3QFY11 and `19.8 bn in 4QFY10;
our estimate was at `15.1 bn. The stronger-than-expected performance was due to higher-thanexpected
refining margins at US$6.9/bbl (our estimate was US$4.8/bbl). However, the results were
negatively impacted by a sharp rise in employee costs to `12.4 bn (+118% qoq and +62% yoy)
which reflects (1) one time contribution of `3.7 bn to the defined contribution scheme (DCS) and
(2) `4.6 bn due to revision in pay of non-executive employees and liability due to the DCS.
Healthy EPS of `45.7 for FY2011
We highlight that BPCL has reported strong earnings of `45.7 for FY2011 which should allay
investor concerns to some extent and give confidence about the government’s likely philosophy of
protecting the earnings of downstream companies. However, a stable and pragmatic subsidysharing
and pricing mechanism would help in reducing earnings uncertainty for the companies
and boosting investor sentiment. We highlight that upstream companies bore 38.7% of gross
under-recoveries for FY2011 resulting in net under-recoveries of `69 bn for the downstream
companies. BPCL has borne `15.8 bn as net under-recovery in FY2011 versus `12.4 bn in FY2010.
Strong quarter for refining segment given large adventitious gains
BPCL’s 4QFY11 refining margins were at US$6.9/bbl versus US$4.6/bbl in 3QFY11 and US$3.7/bbl
in 4QFY10. The refining margins were boosted by adventitious gains of US$1.6/bbl in 4QFY11
versus US$1.9/bbl in 3QFY11. We note that BPCL’s adventitious gains are lower compared to
adventitious gains reported by other refiners—US$2.7/bbl for HPCL, US$6.3/bbl for MRPL. BPCL’s
crude throughput stood at 5.58 mn tons (-2% yoy and +11% qoq) in 4QFY11. 4QFY11 sales
volumes (domestic) increased 7% yoy and 5% qoq to 7.8 mn tons.
Fine-tuned earnings, maintain ADD with a revised target price of `735
We have revised our FY2012-14E EPS to `42 (-2.2%), `54 (-1%) and `62 (+2.8%) to reflect (1)
4QFY11 results, (2) higher crude throughput, (3) higher employee cost and (4) other minor
changes. We maintain our ADD with a revised target price of `735 based on 10X FY2013E
adjusted EPS of `50 plus value of investments. Key downside risk stems from higher-than-expected
net under-recoveries
Compensation (cash) from the government and discounts from the upstream oil
companies. BPCL received `46.6 bn as compensation from the government in 4QFY11.
BPCL received `34.2 bn of discounts from the upstream companies in 4QFY11 compared
to `11.7 bn in 3QFY11 and `14.7 bn in 4QFY10. BPCL’s net over-recovery was `7.4 bn
compared to net under-recovery of `5.3 bn in 3QFY11 and net over-recovery of `14 bn in
4QFY10. BPCL’s gross under-recovery in FY2011 was `180 bn and net under-recovery
was `15.8 bn compared to gross under-recovery of `101 bn and net under-recovery of
`12.4 bn in FY2010.
Refining margins improve qoq. BPCL’s 4QFY11 refining margin was US$6.9/bbl versus
US$4.6/bbl in 3QFY11 and US$3.7/bbl in 4QFY10. We note that the company had
reported adventitious gains of `1.6 bn in 4QFY11 versus `1.9 bn in 3QFY11. BPCL’s
FY2011 refining margin was US$4.5/bbl against US$3/bbl in FY2010. The company
reported adventitious gains of `10 bn in FY2011 (US$1.4/bbl) versus `8 bn in FY2010.
Refining throughput higher; sales volumes increase yoy. BPCL’s two refineries
processed 5.6 mn tons of crude in 4QFY11 compared to 5 mn tons in 3QFY11 and 5.7
mn tons in 4QFY10. FY2011 crude throughput was 21.8 mn tons (+6.7% yoy). BPCL’s
sales volume (domestic) was 7.8 mn tons for 4QFY11 (+7% yoy and +4.9% qoq). FY2011
domestic sales volumes increased 5.7% yoy to 29.3 mn tons. The yoy growth in sales was
led by strong growth in gasoline (+9.5%), diesel (+9.9%), LPG (9.9%), which was
partially offset by decline in sales of fuel oil (-19.6%) and naphtha (-21.5%).
Employee cost. BPCL’s employee cost increased sharply in 4QFY11 to `12.4bn (+62%
yoy and +118% yoy). The sharp increase reflects (1) one-time contribution of `3.7 bn to
the defined contribution scheme (DCS) and (2) `4.6 bn due to revision in pay of nonexecutive
employees and liability to the DCS.
Dividend of `14 for FY2011. BPCL has declared a dividend of `14 for FY2011 which
represents a payout ratio of 33%. BPCL had declared a dividend of `14 for FY2010.
Earnings revisions and key assumptions behind earnings model
We have revised our FY2012E, FY2013E and FY2014E EPS estimates to `41.7, `54.1 and
`62.4 from `42.6, `54.6 and `60.7. We discuss key assumptions (see Exhibit 2) behind our
earnings model below.
Compensation from government and discount from upstream companies. We
model BPCL to receive compensation of `168 bn, `143 bn and `62 bn from the
government in FY2012E, FY2013E and FY2014E. We assume BPCL to receive discount of
`119 bn for FY2012E, `80 bn for FY2013E and `39 bn for FY2014E from the upstream
companies. We assume net under-recoveries at `17.4 bn, `17.2 bn and `16.6 bn for
FY2012E, FY2013E and FY2014E against `15.8 bn in FY2011. We assume total net
under-recoveries of the downstream oil companies at `74 bn in FY2012E and FY2013E
compared to `69 bn in FY2011.
Refining margins. We model refining margin for BPCL at US$4.1/bbl in FY2012E,
US$4.3/bbl in FY2013E and US$4.5/bbl in FY2014E compared to US$4.5/bbl in FY2011.
We assume no gains or losses for the future years versus adventitious gains of `10 bn
(US$1.4/bbl) in FY2011.
Crude throughput. We model crude throughput at 22.4 mn tons, 22.6 mn tons and
22.6 mn tons in FY2012E, FY2013E and FY2014E versus 21.8 mn tons in FY2011.
Marketing margins. We model marketing margin on gasoline and diesel at `675/ton
and –`10,503/ton in FY2012E and `1,900/ton and –`6,849/ton in FY2013E compared to
–`2,984/ton and –`3,243/ton in FY2011. We do not assume any increase in diesel, LPG
and kerosene retail prices throughout our forecast period.
Exchange rate. We assume `/US$ exchange rate for FY2012E, FY2013E and FY2014E at
`45.5/US$, `44/US$ and `44/US$. A stronger rupee is moderately negative for earnings
of BPCL for the refining segment although it is positive for marketing margins of
controlled products in that under-recoveries will be likely lower.
Fair valuation of BPCL (`)
2013E
Valuation based on P/E multiple
Profit after tax (Rs mn) 19,546
Less: income from investments valued separately (Rs mn) 1,458
Adjusted profit after tax (Rs mn) 18,087
Adjusted EPS 50
P/E multiple (X) 10
Fair value on P/E (without value of investments) (A) 500
Add: Value of investments (Rs mn) 84,625
KRL treasury shares 24,791
Numaligarh 13,606
Indraprastha Gas 8,442
Oil India Ltd 8,239
Petronet LNG 7,875
Other equity 21,672
Value of investments (Rs) (B) 234
Total equity value (A) + (B) 734
Current stock price 627
Potential upside (%) 17
Source: Kotak Institutional Equities estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Petroleum (BPCL)
Energy
Upstream contribution and strong refining margins boost earnings. BPCL
reported strong 4QFY11 net income at `9.4 bn (+220% qoq and -25% yoy) versus our
estimate of `8.3 bn led by (1) higher discounts received from upstream companies and
(2) strong refining margins at US$6.9/bbl (helped by adventitious gains). However,
results were impacted by high employee costs at `12.4 bn (+118% qoq and 62% yoy).
BPCL reported healthy EPS of `45.7 for FY2011. We maintain our ADD rating on BPCL
given 17% potential upside to our revised target price of `735 (`740 previously).
Strong earnings given (1) higher discounts from upstream and (2) good refining margins
BPCL reported 4QFY11 EBITDA at `16.6 bn versus `7.5 bn in 3QFY11 and `19.8 bn in 4QFY10;
our estimate was at `15.1 bn. The stronger-than-expected performance was due to higher-thanexpected
refining margins at US$6.9/bbl (our estimate was US$4.8/bbl). However, the results were
negatively impacted by a sharp rise in employee costs to `12.4 bn (+118% qoq and +62% yoy)
which reflects (1) one time contribution of `3.7 bn to the defined contribution scheme (DCS) and
(2) `4.6 bn due to revision in pay of non-executive employees and liability due to the DCS.
Healthy EPS of `45.7 for FY2011
We highlight that BPCL has reported strong earnings of `45.7 for FY2011 which should allay
investor concerns to some extent and give confidence about the government’s likely philosophy of
protecting the earnings of downstream companies. However, a stable and pragmatic subsidysharing
and pricing mechanism would help in reducing earnings uncertainty for the companies
and boosting investor sentiment. We highlight that upstream companies bore 38.7% of gross
under-recoveries for FY2011 resulting in net under-recoveries of `69 bn for the downstream
companies. BPCL has borne `15.8 bn as net under-recovery in FY2011 versus `12.4 bn in FY2010.
Strong quarter for refining segment given large adventitious gains
BPCL’s 4QFY11 refining margins were at US$6.9/bbl versus US$4.6/bbl in 3QFY11 and US$3.7/bbl
in 4QFY10. The refining margins were boosted by adventitious gains of US$1.6/bbl in 4QFY11
versus US$1.9/bbl in 3QFY11. We note that BPCL’s adventitious gains are lower compared to
adventitious gains reported by other refiners—US$2.7/bbl for HPCL, US$6.3/bbl for MRPL. BPCL’s
crude throughput stood at 5.58 mn tons (-2% yoy and +11% qoq) in 4QFY11. 4QFY11 sales
volumes (domestic) increased 7% yoy and 5% qoq to 7.8 mn tons.
Fine-tuned earnings, maintain ADD with a revised target price of `735
We have revised our FY2012-14E EPS to `42 (-2.2%), `54 (-1%) and `62 (+2.8%) to reflect (1)
4QFY11 results, (2) higher crude throughput, (3) higher employee cost and (4) other minor
changes. We maintain our ADD with a revised target price of `735 based on 10X FY2013E
adjusted EPS of `50 plus value of investments. Key downside risk stems from higher-than-expected
net under-recoveries
Compensation (cash) from the government and discounts from the upstream oil
companies. BPCL received `46.6 bn as compensation from the government in 4QFY11.
BPCL received `34.2 bn of discounts from the upstream companies in 4QFY11 compared
to `11.7 bn in 3QFY11 and `14.7 bn in 4QFY10. BPCL’s net over-recovery was `7.4 bn
compared to net under-recovery of `5.3 bn in 3QFY11 and net over-recovery of `14 bn in
4QFY10. BPCL’s gross under-recovery in FY2011 was `180 bn and net under-recovery
was `15.8 bn compared to gross under-recovery of `101 bn and net under-recovery of
`12.4 bn in FY2010.
Refining margins improve qoq. BPCL’s 4QFY11 refining margin was US$6.9/bbl versus
US$4.6/bbl in 3QFY11 and US$3.7/bbl in 4QFY10. We note that the company had
reported adventitious gains of `1.6 bn in 4QFY11 versus `1.9 bn in 3QFY11. BPCL’s
FY2011 refining margin was US$4.5/bbl against US$3/bbl in FY2010. The company
reported adventitious gains of `10 bn in FY2011 (US$1.4/bbl) versus `8 bn in FY2010.
Refining throughput higher; sales volumes increase yoy. BPCL’s two refineries
processed 5.6 mn tons of crude in 4QFY11 compared to 5 mn tons in 3QFY11 and 5.7
mn tons in 4QFY10. FY2011 crude throughput was 21.8 mn tons (+6.7% yoy). BPCL’s
sales volume (domestic) was 7.8 mn tons for 4QFY11 (+7% yoy and +4.9% qoq). FY2011
domestic sales volumes increased 5.7% yoy to 29.3 mn tons. The yoy growth in sales was
led by strong growth in gasoline (+9.5%), diesel (+9.9%), LPG (9.9%), which was
partially offset by decline in sales of fuel oil (-19.6%) and naphtha (-21.5%).
Employee cost. BPCL’s employee cost increased sharply in 4QFY11 to `12.4bn (+62%
yoy and +118% yoy). The sharp increase reflects (1) one-time contribution of `3.7 bn to
the defined contribution scheme (DCS) and (2) `4.6 bn due to revision in pay of nonexecutive
employees and liability to the DCS.
Dividend of `14 for FY2011. BPCL has declared a dividend of `14 for FY2011 which
represents a payout ratio of 33%. BPCL had declared a dividend of `14 for FY2010.
Earnings revisions and key assumptions behind earnings model
We have revised our FY2012E, FY2013E and FY2014E EPS estimates to `41.7, `54.1 and
`62.4 from `42.6, `54.6 and `60.7. We discuss key assumptions (see Exhibit 2) behind our
earnings model below.
Compensation from government and discount from upstream companies. We
model BPCL to receive compensation of `168 bn, `143 bn and `62 bn from the
government in FY2012E, FY2013E and FY2014E. We assume BPCL to receive discount of
`119 bn for FY2012E, `80 bn for FY2013E and `39 bn for FY2014E from the upstream
companies. We assume net under-recoveries at `17.4 bn, `17.2 bn and `16.6 bn for
FY2012E, FY2013E and FY2014E against `15.8 bn in FY2011. We assume total net
under-recoveries of the downstream oil companies at `74 bn in FY2012E and FY2013E
compared to `69 bn in FY2011.
Refining margins. We model refining margin for BPCL at US$4.1/bbl in FY2012E,
US$4.3/bbl in FY2013E and US$4.5/bbl in FY2014E compared to US$4.5/bbl in FY2011.
We assume no gains or losses for the future years versus adventitious gains of `10 bn
(US$1.4/bbl) in FY2011.
Crude throughput. We model crude throughput at 22.4 mn tons, 22.6 mn tons and
22.6 mn tons in FY2012E, FY2013E and FY2014E versus 21.8 mn tons in FY2011.
Marketing margins. We model marketing margin on gasoline and diesel at `675/ton
and –`10,503/ton in FY2012E and `1,900/ton and –`6,849/ton in FY2013E compared to
–`2,984/ton and –`3,243/ton in FY2011. We do not assume any increase in diesel, LPG
and kerosene retail prices throughout our forecast period.
Exchange rate. We assume `/US$ exchange rate for FY2012E, FY2013E and FY2014E at
`45.5/US$, `44/US$ and `44/US$. A stronger rupee is moderately negative for earnings
of BPCL for the refining segment although it is positive for marketing margins of
controlled products in that under-recoveries will be likely lower.
Fair valuation of BPCL (`)
2013E
Valuation based on P/E multiple
Profit after tax (Rs mn) 19,546
Less: income from investments valued separately (Rs mn) 1,458
Adjusted profit after tax (Rs mn) 18,087
Adjusted EPS 50
P/E multiple (X) 10
Fair value on P/E (without value of investments) (A) 500
Add: Value of investments (Rs mn) 84,625
KRL treasury shares 24,791
Numaligarh 13,606
Indraprastha Gas 8,442
Oil India Ltd 8,239
Petronet LNG 7,875
Other equity 21,672
Value of investments (Rs) (B) 234
Total equity value (A) + (B) 734
Current stock price 627
Potential upside (%) 17
Source: Kotak Institutional Equities estimates
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