CMP Rs717, Target Rs750, Upside 4.6%
Sharp jump in government contribution leads to higher revenues
Bharat Petroleum Corporation Ltd (BPCL) reported 42.8% yoy rise in net sales to Rs647bn for Q4 FY12. Market sales at 8.2mn tons were higher by 6.1% yoy on the back robust increase in sales of petrol diesel and LPG. However, volumes of naphtha and furnace oil witnessed a sharp fall. Realizations have been higher in line with average crude oil prices during the period and price hike implemented towards the end of Q1 FY12 for LPG and HSD. During Q4 FY12, BPCL accounted for Rs43.3bn as compared to Rs34.2bn in Q4 FY11 from upstream companies in the form of discounts on purchase of crude oil, LPG and SKO. For Q4 FY12, Rs91.5bn has been accounted from the government as compared to Rs46.6bn in Q3 FY11.
Uncertainty on subsidy sharing pattern continues
During FY12, upstream companies bore 39.7% of the gross under recoveries in the industry as compared to 38% in 9m FY12. For BPCL, cumulative FY12 gross under recoveries were at Rs326bn, of which government share was at Rs197bn and upstream share was Rs129bn. While the accounting has been done, cash flow from the government has been sporadic.
Refining segment improves qoq
During Q4 FY12, BPCL refineries had a combined throughput of 6mn tons, an increase of 7.5% yoy. With market sales growing by 6.1%, the marketing volumes to total throughput ratio decreased from 1.51x in Q1 FY12 to 1.37x in Q4 FY12. GRMs for Q4 FY12 were at US$4.2/bbl as compared to US$6.9/bbl in Q4 FY11 and US$3.5/bbl in Q3 FY12.
Higher interest and lower other income on the back of stressed working cap situation
During Q4 FY12, BPCL reported a net profit of Rs39.6bn vs Rs9.4bn in Q4 FY11. The main driver for the profitability has been the fact that BPCL had an over recovery of Rs36.2bn in the quarter owing to higher government contribution. However, with cash flows from government being sporadic, working capital requirements have been mounting leading to higher debt levels and commensurate increase in interest costs. Other income was lower by 13.1% yoy.
Key takeaways from the conference call
For FY12, gross under recoveries for individual products were to the tune of Rs205bn for HSD, Rs77bn for LPG and Rs44bn for SKO.
While Mumbai refinery earned a GRM of US$3.12/bbl for FY12 and US$3.3/bbl for Q4 FY12, Kochi refinery earned a GRM of US$3.2/bbl for FY12 and US$5.27/bbl for Q4 FY12.
Bina refinery operated at 55-60% in Q4 FY12 and clocked a GRM of US$11/bbl. In FY13 so far, the refinery has been operating at close to 90%. As per the management, the refinery would garner a steady state GRM of US$9-11/bbl. Operating costs are expected to be in the range of US$2.5-3/bbl at optimum capacity utilization.
The company has planned a capex of Rs45-55bn for FY13, of which Rs7-8bn would be spent towards expansion of Kochi refinery, Rs15-16bn towards E&P, Rs5-6bn towards Mumbai refinery, Rs7bn for LPG cylinders for new connections and Rs6-8bn towards retail outlets. The company has also lined up Rs20bn E&P capex for FY14.
Over 10-12 wells are expected to be drilled in the Mozambique block and 8-9 wells are likely to be drilled in the Brazil block.
E&P value could offset uncertainty over subsidy issue
Petrol prices have been raised, however the prices of other key products Diesel, SKO and LPG continue to be unchanged. If the rupee averages at Rs55/US$, crude averages at US$110/bbl, product spreads stay at current levels and no price hikes are implemented for these products, OMCs will lose about Rs1.8 trillion as gross under recoveries. At 60% share, government will have to dole out Rs1.1trillion, which will be difficult considering the mounting current account deficit. Hence, the uncertain subsidy sharing pattern can pose significant risks to earnings of OMCs.
However, for BPCL, recent large discoveries in its E&P portfolio (Mozambique and Brazil) will create an offsetting impact against the subsidy dynamics. We maintain our MP rating with a 9-month price target of Rs750.