Bharat Petroleum Corporation Limited

RESEARCH
EQUITY RESEARCH July 04, 2008

RESULTS REVIEW Bharat Petroleum Corporation Limited Hold

Under-recoveries remain a cause for concern
Share Data
Market Cap Rs. 82.54 bn For FY08, Bharat Petroleum Corporation Limited (BPCL) reported a
Price Rs. 228.30 13% yoy growth in net sales led by higher sales volume of 28.01 MMT. The
BSE Sensex 13,454.00
improvement in net sales can also be attributed to the issue of oil bonds
Reuters BPCL.BO
Bloomberg BPCL IN worth Rs. 85.9 bn by the Government of India (GoI). In addition, the gross
Avg. Volume (52 Week) 0.14 mn refining margins (GRM) improved significantly to USD 4.6/bbl (up
52-Week High/Low Rs. 560/206
26.4% yoy) for the Mumbai refinery and USD 7.18/bbl (up 107.5% yoy) for
Shares Outstanding 361.54 mn
the Kochi refinery.
Valuation Ratios (Consolidated) However, the sky-rocketing crude prices in the global market along with the
Year to 31 March 2009E 2010E price controls administered by the government in the domestic market kept
EPS (Rs.) 31.8 37.8
the operations difficult for the oil marketing companies (OMCs).
+/- (%) (24.9%) 18.7%
PER (x) 7.2x 6.0x Consequently, the share of OMCs in the under-recoveries remained high
EV/ Sales (x) 0.1x 0.1x during the year. After the previous price hike in Feb’08, the GoI undertook
EV/ EBITDA (x) 5.8x 5.1x
another price hike in June’08 to provide some respite to the OMCs. The
Shareholding Pattern (%) prices of petrol, diesel, and domestic LPG were revised upward by
Promoters 64 Rs. 5/litre, Rs. 3/litre, and Rs. 50/cylinder, respectively. However, the oil
FIIs 11
companies were expecting a hike of Rs. 21.4/litre for petrol, Rs. 31.6/litre for
Institutions 19
Public & Others 6 diesel, and Rs. 353 per cylinder for LPG to absorb under-recoveries entirely.
Consequently, the GoI and OMCs would still continue to absorb a major
Relative Performance
portion of the under-recoveries. As a result, we anticipate that the rising

700 crude prices without a corresponding increase in the retail selling prices
600
would adversely impact the profitability of the OMCs.
500
400 At the current price of Rs. 228.3, the stock trades at a forward P/E of 7.2x
300
200 and 6x for FY09E and FY10E, respectively. Based on our valuation and
100
results analysis, we believe that the stock is fairly priced at the current
Jul-07
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Nov-07
Dec-07
Jan-08
Feb-08

Apr-08
May-08
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Mar-08

levels, and reiterate our Hold rating on the stock.

Key Figures (Consolidated)
BPCL Rebased BSE Index
Quarterly Data Q4'07 Q3'08 Q4'08 YoY% QoQ% FY07 FY08 YoY%
(Figures in Rs. mn, except per share data)

Net Sales 244,369 289,678 327,632 34.1% 13.1% 984,192 1,112,431 13.0%
EBITDA 13,934 6,786 8,274 (40.6%) 21.9% 45,196 37,037 (18.1%)
Adj. Net Profit 7,264 (468) (41) (100.6%) (91.2%) 22,724 15,332 (32.5%)

Margins(%)

EBITDA 5.7% 2.3% 2.5% 4.6% 3.3%

NPM 3.0% (0.2%) (0.0%) 2.3% 1.4%

Per Share Data (Rs.)

Normalised EPS 20.1 (14.4) 0.00 (100.0%) (100.0%) 62.8 42.4 (32.5%)
Please see the end of the report for disclaimer and disclosures. -1-
 Bharat Petroleum Corporation Limited
RESEARCH
EQUITY RESEARCH July 04, 2008

Result Highlights

Top-line supported by oil
bonds issued by GoI worth
Rs. 85.9 bn
For the year ended Mar’08, consolidated net sales increased 13% yoy to
Rs. 1,112.4 bn, driven by higher sales volumes of 28.01 MMT (domestic and
exports). Increase in sales volume of 10.4% yoy was also supported by a
rise in crude thruput (up 5.6% yoy to 23.52 MMT). Further, oil bonds worth
Rs. 85.9 bn issued by the GoI contributed to the increase in the top line.

Physical Performance

6
5
MMT

3
2

1
0
Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08

Sales Volume (including exports) Crude Throughput

Gross Refining Margin ($/barrel)
8 7.18
7
Despite a healthy growth of 13% yoy in net sales, EBITDA for FY08 declined
18.1% yoy to Rs. 37 bn, and EBITDA margin went down by 130 bps yoy
from 4.6% in FY07 to 3.3% in FY08. The decrease in EBITDA margin was
primarily due to a higher raw material cost and increase in the prices of

6 products and crude purchased from the international markets. However, the
4.60
5 3.64 3.46 Company’s GRMs witnessed an increase, which was in-line with the global
4 trends. While the GRM for the Mumbai refinery increased from USD 3.64 per
3 barrel in FY07 to USD 4.60 per barrel (up 26.4% yoy) in FY08, the GRM for
2 the Kochi refinery jumped from USD 3.46 per barrel in FY07 to USD 7.18 per
1 barrel (up 107.5% yoy) in FY08.
0 Adjusted net profit also declined 32.5% yoy to Rs. 15.3 bn, and net profit
FY07 FY08
margin went down 93 bps to 1.4%. The fall in the net profit margin was also
Mumbai Refinery Kochi Refinery
due to exceptionally higher effective tax rate of 42.4% yoy for the year.

Please see the end of the report for disclaimer and disclosures. -2-
 Bharat Petroleum Corporation Limited
RESEARCH
EQUITY RESEARCH July 04, 2008

Key Events

• Sabarmati Gas, a retail JV between Gujrat State Petroleum Corporation

(GSPC) and BPCL, is planning to raise Rs. 1.4 bn by offering equity
stake to strategic partners for a premium. The company has also
chacked out a business development plan with a projected cost of
Rs. 4.1 bn. Around 2.7 bn is expected to be raised through the term
loan, and the balance is likely to be raised through IPO route after 3-4
years.
• BPCL is planning to set up a JV company in consortium with Shapoorji
Pallonji and Nandan Biomatrix for the establishment of bio-diesel value
chain in Uttar Pradesh by subscribing to 33.33% of equity capital for an
amount of Rs. 2.7 bn.
• Sabarmati Gas, a retail JV between Gujrat State Petroleum Corporation
and BPCL, is planning to raise Rs. 1.4 bn by offering 50% equity stake
to strategic partners. The amount will be utilised to fund a business
development plan with a projected cost of Rs. 4.1 bn.

Key Risks

The following factors may pose threats to our rating:

• Change in the government’s policy on the subsidy-sharing mechanism

• Unexpected increase in the global crude oil prices

Outlook

BPCL’s performance for the last quarter of FY08 remained ahead of its
peers, IOC and HPCL, due to higher proportion of non-fuel marketing
business and increase issuance of oil bonds as compared to its peers.
Defying the problem of rising under-recoveries, the Company has posted
profits for Mar’08 quarter. While the industry leader IOC has reported net
losses, HPCL’s pre-tax losses got converted into profits owing to the one-
time write back of tax provisions.
Despite reporting a healthy performance, FY08 was challenging for the
Company due to the soaring crude oil prices without a corresponding

Please see the end of the report for disclaimer and disclosures. -3-
 Bharat Petroleum Corporation Limited
RESEARCH
EQUITY RESEARCH July 04, 2008

increase in the domestic retail prices due to government’s administered price

Insufficient price revision and
rising borrowing costs likely to
keep margins under pressure
regime. As a result, the OMCs had to bear the burden of huge
under-recoveries. Moreover, the price hike in petrol, diesel, and domestic
LPG by Rs. 5 per litre, Rs. 3 per litre, and Rs. 50 per cylinder, respectively,
by the government in June’08, provided a nominal relief to the OMCs. We
therefore believe that OMCs would still have to bear a significant portion of
under-recoveries along with the upstream companies and the government,
as a price hike of Rs. 21.4/litre of petrol, Rs. 31.6/litre of diesel, and Rs. 353
per LPG cylinder was required to absorb under-recoveries completely.
With the increasing burden of under-recoveries, BPCL would incur higher
borrowing cost to meet the rising working capital requirements. This would
further add to the existing pressure over margins. Further, the loss of
production due to planned shutdown of Kochi refinery would also aggravate
margin pressure. As a result, the Company would be compelled to import
higher priced crude and other products from other countries to meet the
growing demand.
At the current price of Rs. 228.3, the stock trades at a forward P/E of 7.2x
and 6x for FY09E and FY10E, respectively. Considering the insufficient price
revision and the tightened liquidity situation, we reiterate our Hold rating on
the stock.

Key Figures (Consolidated)

Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%)
(Figures in Rs. mn, except per share data) (FY08-10E)

Net Sales 775,161 984,192 1,112,431 1,329,844 1,342,264 9.8%

EBITDA 17,041 45,196 37,037 32,153 36,873 (0.2%)
Adj. Net Profit 5,219 22,724 15,332 11,508 13,656 (5.6%)

Margins(%)

EBITDA 2.2% 4.6% 3.3% 2.4% 2.7%

NPM 0.7% 2.3% 1.4% 0.9% 1.0%

Per Share Data (Rs.)

Normalised EPS 14.4 62.8 42.4 31.8 37.8 (5.6%)
PER (x) 29.5x 4.8x 5.4x 7.2x 6.0x

Please see the end of the report for disclaimer and disclosures. -4-
 Bharat Petroleum Corporation Limited
RESEARCH
EQUITY RESEARCH July 04, 2008

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