14 November 2013
2QFY14 Results Update | Sector: Oil & Gas
BPCL
BSE SENSEX
20,194
Bloomberg
S&P CNX
5,990
BPCL IN
Equity Shares (m)
CMP: INR333

723.1
M.Cap.(INR b)/(USD b)
240.9/3.8
52-Week Range (INR)
449/256
1, 6, 12 Rel. Per (%)
-1/-21/-9
Financials & Valuation (INR Billion)
Y/E MAR
2013 2014E 2015E
Sales
2,422 2,583 2,618
EBITDA
66.7
67.6
68.5
Adj. PAT
18.8
24.1
27.0
EPS (INR)
26.0
33.3
37.4
EPS Gr. (%)
140.9 27.9
12.3
BV/Sh.(INR)
232
255
280
RoE (%)
11.5
13.7
14.0
RoCE (%)
8.3
7.6
7.4
P/E (x)
12.8
10.0
8.9
P/BV (x)
1.4
1.3
1.2
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

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Buy
EBITDA higher than expected, led by adventitious inventory gains: BPCL
reported EBITDA of INR16.9b for 2QFY14, significantly ahead of our estimate of
INR12.5b, led by (a) positive impact of INR4.2b on account of higher GRMs, and
(b) INR8.6b of adventitious inventory gains. This was partially negated by (a) forex
loss of INR4.9b, and (b) INR4.6b led by higher net under-recoveries due to lower
government subsidy.
PAT boosted by lower interest cost and higher other income: BPCL’s reported
PAT of INR9.3b (down 82% YoY, but up 6x QoQ) was further boosted by (a) lower
interest expenses at INR3.2b (our est: INR5b), down 21% YoY and 38% QoQ, due
to repayment of debt, (b) higher other income at INR4.8b (our est: INR3.8b),
down 71% YoY, but up 31% QoQ, and (c) lower tax rate of 28.5% v/s est of 34%.
Net under-recovery at INR2.2b; model nil sharing for FY14: While the upstream
companies compensated BPCL INR41.9b in 2QFY14, the government provided
INR44b, implying net under-recovery of INR2.2b for BPCL. For FY14, we model
upstream subsidy sharing at INR686b, with the government sharing the balance
under-recoveries and OMCs sharing nil.
GRM at USD4.7/bbl in 2QFY14, boosted by inventory gains: Reported GRM for
2QFY14 stood at USD4.7/bbl compared with USD6.4/bbl in 2QFY13 and
USD4.1/bbl in 1QFY14. Post the recommendations of the Kirit Parikh Expert
Group, we believe concerns on likely shift to export parity (from trade parity)
have diminished.
Maintain Buy: The Kirit Parikh Panel’s backing of non-viability of export parity
pricing is a big positive. If the recommendations are implemented, it will be a
significant positive for the sector and help to lower under-recoveries and increase
profitability of oil PSUs. Key events to watch: (a) Bina refinery performance, and
(b) E&P developments in Mozambique block. The stock trades at 8.9x FY15E EPS
of INR37.4 and 0.4x FY15E BV (adjusted for investments). Maintain Buy.
Harshad Borawake (HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Kunal Gupta (Kunal.Gupta@MotilalOswal.com); +91 22 3982 5445
Investors are advised to refer through disclosures made at the end of the Research Report.
BPCL
Key concall takeaways
Refining Segment
 While the blended 2QFY14 GRM stood at USD4.7/bbl, GRM at Mumbai refinery
were USD3.6/bbl and at Kochi refinery GRM stood at USD5.9/bbl
 Bina GRMs stood at ~USD11/bbl (excluding product placement of USD2/bbl) for
2QFY14. Refinery is currently operating at ~100%. And management expects this
trend to continue for the remaining part of FY14
 Bina refinery PAT loss stood at INR3.9b for 1HFY14 (it was break even for
2QFY14, implying majority of the loss from 1QFY14). Bina refinery has a debt of
INR130b as on September 30, 2013.
 Numaligarh refinery GRM averaged ~USD4/bbl for 2QFY14. The refinery has
posted a loss of INR1b for 1HFY14
E&P Segment
 BPCL has incurred total capex of ~INR20b on Mozambique and ~INR35b in Brazil
till date.
 Mozambique reserve certification is likely in 1QCY14 while the FID would take
further 6 months after the reserve certification.
 Reserve certification of Brazilian blocks is likely towards CY14 end or early CY15.
 BPCL is planning to drill 2 appraisal wells for the Farfan discovery.
Marketing
 Bulk Diesel – During January 2013 bulk diesel sales accounted for 17% of the
total diesel sales in India while it stood at ~9% for BPCL. Post the de-regulation
in January 2013, the industry sales has come down to ~10% while the same for
BPCL has dropped to ~5.5%.
 Kirit Parikh expert committee report is currently under examination by the Oil
Ministry and will be passed on to Cabinet at a later date.
Others
 BPCL incurred a capex of INR20b during 1HFY14
 Of the total long term loans, ~90% are foreign currency denominated
borrowings while the balance is in INR terms. Also, entire short term borrowings
are foreign currency denominated.
 Average Interest cost for borrowings (forex + rupee loans) is ~9-9.5%.
14 November 2013
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BPCL
Net under-recovery of INR2.2b, despite Govt sharing


2QFY14 subsidy sharing: Of gross under-recovery of INR88b in 2QFY14, BPCL
received INR41.9b from upstream and INR44b from government, resulting in net
under-recoveries of INR2.2b.
Model nil subsidy sharing for OMC’s in FY14/FY15: We model nil subsidy
sharing for OMC’s, upstream share at INR686b/650b and rest by Government.
With high interest cost and crude prices, we believe it would be difficult for
OMCs to share any under-recovery. However, with the recently announced
diesel reforms, we expect the situation to improve for OMC’s in next 2 years.
BPCL shares net under recoveries of INR2.2b during 2QFY14 (INRb)
Source: Company, MOSL
2QFY14 operational highlights
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

GRM stood at USD4.7/bbl v/s USD6.4/bbl in 2QFY13 and USD4.1/bbl in 1QFY14.
Product inventory adventitious gain stood at INR8.6b (v/s INR4.4b in 2QFY13
and INR3b in 1QFY14).
Refinery throughput stood at 6mmt, up 1.7% YoY and 7.3% QoQ.
Marketing volumes were flat YoY and down 9.3% QoQ at 7.8mmt
BPCL: 2QFY14 operational highlights
Source: Company, MOSL
Ad-hoc subsidy sharing resulting in volatile quarterly profits
Source: Company, MOSL
14 November 2013
BPCL: 2QFY14 GRM at USD4.7/bbl (USD/bbl)
Source: Company, MOSL
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BPCL
We model OMC’s sharing at nil in FY14/FY15
Source: Company, MOSL
Valuation and view


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


14 November 2013
Kirit Parikh recommendations, if implemented, will be significantly positive for
Indian Oil and Gas sector helping in lowering of under recoveries and increasing
profitability of oil PSU’s. Even if the implementation is delayed, the sector
outlook still remains positive with continued monthly diesel price hikes, limit on
subsidized LPG cylinders and gradual shift to direct cash transfer in domestic
LPG and PDS Kero.
We are increasing our FY14E/FY15E EPS by 18%/7% to model adventitious
inventory gains of INR8.6b during 2QFY14 and lower interest cost in FY15.
Key Assumptions: We model Brent oil price of USD108.5/105bbl in FY14/FY15 in
our estimates. While, we model INR0.45/ltr diesel price hike per month in our
estimate. We expect OMCs to be fully compensated by upstream’s INR686b and
balance by Government for the under-recoveries on controlled products
Our positive stance on the stock is driven by the ongoing diesel reforms which is
likely to reduce the gross under recoveries by ~40% by FY15. Key events to
watch (apart from subsidy sharing): (a) Bina refinery GRM performance, and (b)
E&P developments in Mozambique block, reserve disclosures.
Expect upside potential in BPCL’s E&P business: Our E&P value of INR151/sh
(Mozambique - INR139 and Brazil - INR12) is conservative vs other transactions
which value only Mozambique at ~INR200/sh. Triggers would be reserve
certification/FID for Mozambique block and results from exploratory drilling in
Brazil.
The stock trades at 8.9x FY15E EPS of INR37.4 and adjusted for investments,
trades attractively at 0.4x FY15E BV. BPCL is our top pick in OMCs for its E&P
potential. Maintain Buy.
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BPCL
BPCL: an investment profile
Company description

A Fortune 500 company, BPCL has interests in oil
refining and marketing of petroleum products. It is the
third largest refining company in India with a capacity of
12mmtpa at its Mumbai facility and 9.5mmtpa at Kochi.
BPCL has majority stake (63%) in Numaligarh Refineries,
a 3mmtpa refinery in the north-east. BPCL has
investments in IGL (22.5%) and Petronet LNG (12.5%).
BPCL is a public sector firm in which the government of
India holds 54.93%.
Diesel reforms to lead to significant cut in under
recoveries: Recently announced diesel reforms (a)
increasing diesel prices by INR 0.45/lt every month
and (b) Market pricing for bulk buyers; would lead to
a significant cut in under recoveries (~40% reduction
in under recoveries in FY15 over FY13).
 BPCL's profitability continues to be determined by
the quantum of under-recoveries and sharing
mechanism, rather than fundamentals.
 Bina refinery commercial production ramp up is
expected in coming quarters. BPCL has 49% stake in
the ~Rs114b Bina refinery, which will have a capacity
of 6mmtpa.
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Delay in diesel deregulation, ad-hoc subsidy sharing.
Non-commensurate increase in retail fuel prices as
oil prices rise leads to under-recoveries for the
company, and ad-hoc nature of subsidy sharing
impacts profits.

OMC’s announced the 11th diesel price hike at
INR0.5/ltr (excluding state levies) effective
November 01 midnight and post the hike, Diesel
price in Delhi stands at INR53.1/ltr
Valuation and view

The stock trades at 8.9x FY15E EPS of INR37.4 and
adjusted for investments, trades attractively at 0.4x
FY15E BV. Maintain Buy.
Sector view

Global economic environment (particularly Europe)
will continue to weigh heavily on refining margins.
While economic outlook continues to remain
uncertain, we expect GRMs to remain range bound
Target price and recommendation
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
Consensus
Forecast
Variation
(%)
33.3
37.4
27.6
31.4
20.7
19.1
Shareholding pattern (%)
Current
Price (INR)
333
Target
Price (INR)
Upside
(%)
Reco.
-
-
Buy
Stock performance (1-year)
Sep-13
Jun-13
Sep-12
Promoter
55.8
55.8
55.8
Domestic Inst
16.7
16.1
17.3
Foreign
9.6
10.3
9.5
Others
17.9
17.9
17.4
14 November 2013
Key investment risks
Recent developments
Key investment arguments
FY14
FY15
BPCL's E&P portfolio is likely to add substantial value
as it completes its appraisal program and gives out
the resource/reserve numbers.
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BPCL
Financials and valuation
14 November 2013
6
BPCL
NOTES
14 November 2013
7
Disclosures
BPCL
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14 November 2013
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