Thursday, May 31, 2012

>BPCL: Better GRMs, full compensation by the government and upstream lead to profits

Government support keeps FY12 PAT in black; E&P remains the trigger

Full compensation for under-recoveries incurred in FY12 by the government (~60%) and the upstream (~40%) aided BPCL’s profitability. Devoid of any absorption on regulated fuels (although it incurred losses on sale of petrol which were absorbed), BPCL reported PAT of Rs13.1bn for FY12. BPCL’s E&P initiative is yielding results with incremental discoveries of hydrocarbon in its Mozambique block. We believe the E&P story is likely to drive stock performance going ahead. We remain positive on regulated fuel price hike and BPCL’s successful E&P initiative and hence maintain Buy on the stock.

 Higher petroleum product prices lead to higher revenues: BPCL‘s revenues climbed up by 42.8% YoY and 9.9% QoQ at Rs646.7bn owing to higher product prices (due to higher crude prices) and slightly higher volumes. Sales of petroleum products jumped by 6.1% YoY and 2.4% QoQ at 8.2mmt. Crude throughput jumped by 7.5% YoY but declined marginally by 2.1% QoQ at 6.0mmt.

 Better GRMs, full compensation by the government and upstream lead to profits in both Q4 and FY12: GRMs improved on a QoQ basis and came in at US$4.2/bbl in Q4 against US$3.5/bbl in Q3 which somewhat supported the performance. Due to higher quantum of under-recoveries during FY12, entire under-recoveries were compensated by the government and the upstream without any absorption left for downstream. Due to this, BPCL was able to show profits for both Q4 and FY12. Although, BPCL did not absorb any loss on regulated fuel, it did absorb losses on petrol (deregulated fuel) which was not compensated. BPCL received Rs129.6bn in subsidies from upstream companies and Rs196.7bn compensation from the government for FY12. Thus the company reported PAT of Rs39.6bn for Q4 and Rs13.1bn for FY12.

 Bina to report double digit GRMs, focus on E&P: BPCL’s Bina refinery operated at about 55-60% utilisation rate during Q4 but is currently operated at about 90% and soon will reach its full capacity (6mmt). With expectation of US$9-11/bbl GRMs, Bina is likely to add to BPCL’s consolidated earnings. BPCL is likely to invest over Rs45-50bn during FY13E of which about Rs15-16bn will be invested in E&P. Reserve estimate for Mozambique block is expected by the end of 2013. We believe higher capacity utilisation of Bina and further positive news flows from E&P are likely to drive BPCL’s stock performance going ahead. We like BPCL due to its exposure in E&P and maintain Buy with a price target of Rs861 (earlier Rs857).