Buy Bharat Petroleum (BPCL) Subsidies drag earnings into red :Macquarie Research,

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Bharat Petroleum
Subsidies drag earnings into red
Event
 BPCL announced a 1Q FY12 net loss of Rs25.6bn; which, when adjusted for
the limited subsidy reimbursement by the Govt, was ~12% lower than our
estimates due to low GRMs. 1Q earnings for Oil marketing companies (OMC)
are typically the worst (especially during high crude prices regimes) due to large
subsidy payouts being delayed by the Government; but are not representative
of earnings potential as subsidy gets finalized on an ad-hoc basis at the yearend. We maintain OP with a raised TP of Rs808; and recommend it as a cheap
(1.5x FY12E P/BV) countercyclical in volatile, bearish market conditions.
Impact
 GRMs at US$3.02/bbl down 15% YoY; refinery volumes down 6.8% QoQ:
Despite high product cracks (>US$15/bbl for gasoline and middle distillates
Diesel and Jet-Kerosene), GRMs fell sharply due to a lack of crude inventory
gains. Throughput was down due to minor maintenance shutdowns in both
the Mumbai and Kochi refineries. Retail sales grew at 7% YoY.
 Upstream shared 33%, Govt 35%; Net losses of Rs33bn for 1Q FY12: The
Government allocated Rs35bn cash to BPCL (Rs150bn total to OMCs), while
upstream sharing reverted to the usual metric of 33% (from 38% in 4Q FY11);
hence BPCL had net losses of Rs33bn for 1Q FY12. We expect OMCs to
share Rs80bn (7% of under-recoveries) in FY12 (Rs18bn to BPCL).
 Subsidy reduction to US$18bn possible through multiple drivers: The
increase in retail prices of petro products and duty cuts on auto-fuels and
crude in July has reduced FY12E under-recoveries by ~30% to US$26bn.
Recent sharp fall in crude prices by ~11% (see Fig 10) has slashed diesel
under-recoveries to almost nil, while gasoline has entered over-recovery (see
Fig 7). At the current run rate, FY12 under-recovery could fall to ~US$18bn.
 Intensification on proposals for structural shift away from subsidy:
Political consensus is being built around reducing the quantum (through limiting
subsidised cylinders per household to 4-6/yr) and ambit (through only targeting
them at income groups above Rs0.6m/yr) of LPG subsidy, and moving to cashbased subsidy transfer, possibly by 2012 itself. Dual-pricing of diesel is another
proposal to curtail subsidy being used by passenger cars. All these measures
should alleviate the burden on OMCs and reduce linked working capital.
Earnings and target price revision
 2-3% cut in FY12-13E PAT. TP increased by Rs14/sh to Rs808 primarily to
incorporate increased market value of BPCL’s investments in IGL, Petronet
LNG, and treasury stock.
Price catalyst
 12-month price target: Rs808.00 based on a Sum of Parts methodology.
 Catalyst: Further fall in crude, clarity on subsidy sharing, Bina refinery rampup.
Action and recommendation
 We continue to believe OMCs offer a safer haven in falling markets. With
global macro-uncertainties looming large and crude prices cooling on the back
of that, OMCs provide an Indian domestic consumption-linked investment
avenue which is inversely correlated to falling markets and crude.