13 February 2014
3QFY14 Results Update | Sector:
Oil & Gas
BPCL
BSE SENSEX
20,448
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
6,084
BPCL IN
723.0
263.8/4.3
428/256
13/14/-16
CMP: INR365
Buy
Financials & Valuation (INR Billion)
Y/E MAR
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
Payout* (%)
Valuation
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div. Yield (%)
9.9
1.4
7.9
2.9
9.5
1.3
7.4
3.0
8.9
1.2
6.8
2.7
2014E 2015E 2016E
2,542 2,574 2,694
74.0
26.6
36.8
41.3
256
15.1
8.8
35.1
71.0
27.8
38.4
4.6
282
14.3
7.9
35.1
71.8
29.6
40.9
6.4
311
13.8
7.7
28.6
*Based on standalone
Ad Hoc subsidy leads to higher loss:
BPCL reported EBITDA loss of INR9.5b for
3QFY14 against our estimate of positive EBITDA of INR847m, led by (a) lower
government compensation at INR25b (our estimate: INR49.7b), (b) lower GRM at
USD1.8/bbl (our estimate: USD3.5/bbl). This was partly compensated by (a)
adventitious inventory gain of INR6.6b, and (b) forex gain of INR3b (accounted in
net expenditure). Reported PAT loss was INR10.9b (our estimate: INR3.9b).
Comparable PAT was INR16.5b in 3QFY13 and INR9.3b in 2QFY14.
Net under-recovery at INR34.6b:
While upstream compensated BPCL INR39.7b
(in-line) in 3QFY14, the government provided only INR253b (our estimate:
INR49.7b); leading to net under-recovery of INR34b for BPCL. Assuming nil sharing
by OMCs in FY14, call on government subsidy in 4QFY14 now rises to ~INR340b.
GRM lower at USD1.8/bbl due to shutdown impact:
3QFY14 GRM at USD1.7/bbl,
down 63% YoY and QoQ, led by partial maintenance shutdown at Kochi and
Mumbai in November and December, and lower product cracks. Adventitious
inventory gains stood at INR6.6b v/s INR3.3b in 3QFY13 and INR8.6b in 2QFY14.
Gross debt down:
BPCL’s gross debt reduced to INR167.4b from INR171b in
2QFY14, driven by lower working capital loans, in turn led by higher creditors.
Upside potential in E&P business:
We value BPCL’s E&P business at INR151/share
(Mozambique: INR139/share; Brazil: INR12/share) against benchmark
Mozambique value at ~INR200/share. Triggers include Mozambique FID and Brazil
reserve announcement.
Maintain Buy:
We expect gross under-recoveries to reduce by ~25%/35% in
FY15/FY16. Earnings growth in the initial reform period will be through lower
interest cost, which could be followed by likely increase in diesel marketing margin
(MM) post deregulation. INR0.5/liter increase in MM increases BPCL’s EPS by
~25%. The stock trades at 9.5x FY15E EPS of INR38.4 and 0.5x FY15E BV (adjusted
for investments). BPCL is our top pick among OMCs for its E&P potential.
Buy.
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Investors are advised to refer through disclosures made at the end of the Research Report.

BPCL
Key concall takeaways
Refining Segment
Update on Bina refinery
Bina GRM in 3QFY14 stood at USD7.8/bbl (v/s USD11/bbl in 2QFY14) and for
9MFY14 stood at 10/bbl.
While PAT loss stood at INR1.4b in 3QFY14 and INR5.3b in 9MFY14.
Debt for Bina refinery stood at INR135b.
Mumbai and Kochi refinery
While the blended 3QFY14 GRM stood at USD1.8/bbl (USD4.7/bbl in 2QFY14),
GRM at Mumbai refinery were USD1.8/bbl (v/s USD3.6/bbl in 2QFY14) and at
Kochi refinery GRM stood at USD1.7/bbl (v/s USD5.9/bbl in 2QFY14).
BPCL is in process of completing 1mmt Continuous Catalytic Regenerator
Reformer (CCR) unit by March 2014. This will help to increase gasoline
production.
Update on Numaligarh refinery
Numaligarh refinery GRM averaged USD4.8/bbl in 9MFY14 and PAT stood at
INR5.0b.
E&P Segment
Final investment decision at Mozambique is expected in 2HCY14.
For Brazilian blocks, earlier BPCL had guided that reserve certification is likely
towards CY14 end or early CY15.
Planned FY15 E&P work program includes drilling of 7 wells in Mozambique and
3 appraisal wells in Brazil with an estimated capex share of USD240m for BPCL.
Other key highlights
Decline in debt to INR167b v/s INR238b in March 2014 was driven by increase in
creditors from INR88b in March 2014 to INR175b in September 2014 coupled
with lower subsidy receivable from the government.
BPCL incurred a capex of INR18b in 3QFY14 (and INR47b in 9MFY14).
Planned capex for FY14/FY15/FY16 stands at INR77/75/100b.
Of the total debt of INR167b, 87% is foreign currency denominated. While
interest cost on short term debt is at ~8-9% and long term debt at ~6%.
13 February 2014
2

BPCL
Call on govt. subsidy for OMC’s at ~INR340b in 4QFY14
On a gross basis (industry level) 9MFY14 under recoveries stood at INR1,006b of
which upstream compensated INR480b, govt. compensated INR268b and the
rest INR259b had to be borne by downstream. Assuming full year downstream
subsidy at nil, we estimate that govt. will have to compensate ~INR340b in
4QFY14.
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.
Govt. compensation not adequate to turn BPCL profitable in 9MFY14:
In
3QFY14, of the gross under-recovery of INR98.73b, BPCL received INR39.7b from
upstream and INR25b from government, resulting in net under-recoveries of
INR34b. The net under recovery for 9MFY14 stands at INR41.6b leading to a net
loss of INR75m for BPCL on a standalone basis.
BPCL shares net under recoveries of INR34b during 3QFY14 (INR b)
INRb
Gross Under recovery
Less: Sharing
Upstream Sharing
Govt. subsidy
Net Under/(over)recovery
As a % of Gross
1Q
116.3
36.6
0.0
79.6
68.5
FY13
2Q
3Q
90.3
93.7
36.2
72.4
(18.3)
(20.3)
36.0
59.9
(2.2)
(2.3)
4Q
89.7
59.6
86.7
(56.7)
(63.2)
1Q
61.3
36.7
19.2
5.4
8.9
FY14
2Q
88.0
41.9
44.0
2.2
2.4
3Q
98.7
39.7
25.0
34.0
34.5
3QFY14
YoY (%)
QoQ (%)
5.3
12.2
10.3
(58.3)
NA
-1,590.4
(5.1)
(43.2)
1,479.8
-72.5
FY11
179.6
69.6
94.2
15.8
8.8
FY12
326.4
129.6
196.7
0.1
0.0
FY13
389.9
168.4
219.0
2.5
0.6
FY14E
335.2
166.1
169.1
0.0
0.0
Source: Company, MOSL
3QFY14 operational highlights
GRM stood at USD1.7/bbl v/s USD4.8/bbl in 3QFY13 and USD4.7/bbl in 2QFY14
led by maintenance shutdown in Kochi as well as Mumbai refinery.
Product inventory adventitious gain stood at INR6.6b (v/s INR3.3b in 3QFY13
and INR8.6b in 2QFY14).
Refinery throughput stood at 5.6mmt, up 1.4% YoY and down 6.8% QoQ.
Marketing volumes were up 3.5% YoY and down 12.6% QoQ at 8.8mmt.
BPCL: 3QFY14 operational highlights
INRb
Product Sales (mmt)
Throughput (mmt)
Mumbai
Kochi
Total
Blended GRM (USD/bbl)
1Q
7.8
3.3
1.9
5.2
3.0
FY12
2Q
7.0
3.1
2.5
5.6
1.7
3Q
8.0
3.5
2.7
6.1
3.5
4Q
8.2
3.4
2.6
6.0
4.2
1Q
8.5
3.3
2.6
5.9
2.6
FY13
2Q
7.8
3.2
2.8
5.9
6.4
3Q
8.5
3.4
2.2
5.6
4.8
4Q
8.6
3.2
2.6
5.8
6.0
1Q
8.6
3.0
2.7
5.6
4.1
FY14
2Q
7.8
3.3
2.7
6.0
4.7
3Q
8.8
3.4
2.2
5.6
1.8
3QFY14
YoY (%)
QoQ (%)
3.5
12.6
1.8
0.9
1.4
(63.3)
3.0
(18.9)
(6.8)
(62.2)
Source: Company, MOSL
13 February 2014
3

BPCL
Ad-hoc subsidy sharing resulting in volatile quarterly profits
BPCL: 3QFY14 GRM at USD1.8/bbl (USD/bbl)
Source: Company, MOSL
Source: Company, MOSL
We model OMC’s sharing at nil in FY14/FY15
(INR b)
FY11
FY12
Fx Rate (INR/USD)
45.6
47.9
Brent (USD/bbl)
86
114
Product Sales (mmt)
96
100
Product-wise Gross Under recoveries (INR b)
Petrol
27
0
Diesel
348
819
Kerosene
200
278
LPG
205
284
Total
780
1,385
Sharing of Gross Under recoveries (INR b)
Government
410
829
Upstream
303
552
SA Refiners
0
0
OMC's
67
0
Total
780
1,385
Sharing of Gross Under recoveries (%)
Government
53
60
Upstream
39
40
OMC's
9
0
Total
100
100
FY13
54.5
111
104
0
915
296
399
1,610
1,000
600
10
1,610
62
37
1
100
FY14E
60.6
109
98
0
644
309
443
1,396
710
686
0
1,396
51
49
0
100
FY15E
61.0
105
112
0
326
289
418
1,032
382
650
0
1,032
FY16E
60.0
105
118
0
209
268
425
902
343
541
18
902
37
38
63
60
0
2
100
100
Source: Company, MOSL
Valuation and view
Our positive stance on the stock is driven by (a) its large E&P potential and (b)
ongoing diesel reforms. We expect gross under recoveries to reduce by ~25% in
FY15 and ~35% in FY16 over FY14E. For OMC’s, in the initial period of reforms,
earnings growth would be from reduction in interest cost which could be
followed by likely increase in the diesel marketing margins post deregulation.
INR0.5/ltr increase in diesel marketing margin could increase BPCL’s EPS by
~25%.
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 9.5x FY15E EPS of INR38.4 and adjusted for investments,
trades attractively at 0.5x FY15E BV. BPCL is our top pick in OMCs for its E&P
potential. Maintain
Buy.
4
13 February 2014

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%.
BPCL's E&P portfolio is likely to add substantial
value
as it completes its appraisal program and gives
out the resource/reserve numbers.
Key investment risks
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.
Key investment arguments
Diesel reforms to lead to significant cut in under
recoveries:
Recently announced diesel reforms (a)
increasing diesel prices by INR 0.5/ltr every month
and (b) Market pricing for bulk buyers; would lead to
a significant cut in under recoveries (~35% reduction
in under recoveries in FY15 over FY13).
BPCL's current profitability continues to be
determined by the quantum of under-recoveries and
sharing mechanism, rather than fundamentals.
Likely Bina refinery IPO
in 1-2 years could help
unlock value for BPCL. BPCL has 49% stake in the
~Rs114b Bina refinery, which has a capacity of
6mmtpa (expansion under consideration).
Recent developments
OMC’s announced the 13th diesel price hike of
INR0.5/ltr (excluding state levies) effective January
31 midnight. Post the hike, Diesel loss stands at
INR7.4/ltr and price in Delhi stands at INR54.9/ltr.
Valuation and view
The stock trades at 9.5x FY15E EPS of INR38.4 and
adjusted for investments, trades attractively at 0.5x
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
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
36.8
38.4
Consensus
Forecast
28.2
31.6
Variation
(%)
30.5
21.6
Target price and recommendation
Current
Price (INR)
365
Target
Price (INR)
-
Upside
(%)
-
Reco.
Buy
Shareholding pattern (%)
Dec-13
Promoter
Domestic Inst
Foreign
Others
55.8
16.8
10.2
17.2
Sep-13
55.8
16.7
9.6
17.9
Dec-12
55.8
16.9
10.1
17.2
Stock performance (1-year)
13 February 2014
5

BPCL
Financials and valuation
13 February 2014
6

BPCL
NOTES
13 February 2014
7

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BPCL
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13 February 2014
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