>BHARAT PETROLEUM CORPORATION LIMITED (MORGAN STANLEY)

F1Q10: Back to Profit, Despite No Gov’t. Bonds

Quick Comment – Impact on our views: BPCL reported its F1Q10 results with Rs7.5bn in EBITDA and Rs6.1bn in net profit against losses the same time last year; 40% above our expectations. Earnings included Rs2.3bn in forex gains and Rs3bn in inventory gains. Adjusting for both, profits would have been half. The earnings do not include any government bonds because of the LPG and Kerosene subsidy but do include Rs1.57bn in upstream share because of gasoline and diesel. We would not be surprised if in the future the
government compensates BPCL by issuing bonds worth Rs9.4bn, the under recovery for the quarter.

What We Liked
Improving balance sheet: The company had zero net debt and reported higher interest income than interest costs. In F2009, BPCL had a net interest cost of Rs7.5bn and peak debt-to-equity ratio of 6x.

Subsidy burden under control: For F1Q, BPCL had gross under recoveries of Rs10.8bn and received Rs1.6bn in subsidy support from upstream companies. This under recovery is one-tenth the under recovery in F1Q09. However, it would have been better had the government settled oil bonds on a quarterly basis.

High extra ordinaries: BPCL earned Rs2.3bn in forex gains and Rs3.0bn in inventory with staff costs lower by Rs2.5bn due to certain extra ordinaries last year.

What we did not like
Throughput was down 16% YoY, 14% QoQ, due to a partial shutdown of the Kochi and Mumbai refineries. This also led to BPCL earning a low GRM of US$3.16/bbl, a negative spread of US$0.93/bbl.

We now believe that the government has reduced the uncertainty over future profitability in the R&M sector in India. However, we would prefer that the government issue oil bonds on a quarterly basis or least indicate the calculation mechanism. We maintain our Overweight
stance on and earnings forecasts for BPCL.

To see full report: BPCL