BPCL: Q3 a blip on higher under-recoveries

With the govt likely to compensate OMCs for under-recoveries for the fiscal, its prospects remain strong led by its E&P base

Bharat Petroleum Corporation’s (BPCL) results for the December quarter, though disappointing mainly because of the operating losses, can be taken as a blip. The street was largely expecting BPCL to report a net loss of Rs 1,006 crore, as it had not received adequate compensation from the government for the under-recoveries (the difference between the subsidised selling prices of fuel versus actual costs).

Nevertheless, the under-recovery is not a major concern for oil marketing companies (OMCs) such as BPCL, as in the past, the government has ensured these companies do not report losses by compensating them adequately (though at times with a lag). Analysts at Motilal Oswal Securities model zero under-recovery for the company in FY14 and FY15. Thus, despite BPCL reporting loss of Rs 1,089 crore in the quarter against net profit of Rs 1,648 crore last year, the stock closed 1.5 per cent up at Rs 364.80 on Wednesday.

Stable crude oil prices and regular diesel price rises bode well for OMCs. Regular increases in diesel prices have helped reduce under-recovery for diesel to Rs 7.4 a litre in January 2014 (versus Rs 10.3 in December 2013 and Rs 9 in January 2013) despite rupee depreciation. Though there has been some concern over the recent increase in number of subsidised LPG cylinders to households, even after taking it into consideration analysts peg the sector’s under-recoveries at Rs 1,05,000 crore for FY15, much lower than estimated Rs 1,39,000 crore in FY14.

For BPCL, the exploration and production (E&P) activities being carried out in Brazil and Mozambique are an important differentiating factor compared to its peers. The same will transform it from a down-stream company to being an upstream player with presence across the value chain. Hence, for arriving at the target price, the value of core and upstream businesses are essential. Analysts at Antique Broking have a target price of Rs 542. They value BPCL’s core business at 0.9 times FY15 estimated book value and eight times FY16 EPS, upstream at Rs 180 a share and listed investments at Rs 30 a share. Analysts at JP Morgan and Ambit in their reports dated February 12, have target price of Rs 450 and Rs 392. Of the six analysts polled by Bloomberg in February, all have ‘Buy’ ratings on BPCL with consensus target price of Rs 444, indicating an upside of 21 per cent.

Meanwhile, for the December quarter, BPCL’s market sales stood at 8.77 million tonnes (mt) much higher than 7.79 mt in September 2013 quarter and better than 8.47 mt in the December 2012 quarter. However, throughput for its refineries during first nine months at 17.3 mt is almost flat due to maintenance shutdown at its refineries in Cochin and Mumbai. This and the fact that benchmark-Singapore GRM’s (gross refining margin) in the quarter were subdued saw BPCL’s GRMs fall to $1.76 a barrel compared to analyst expectations of $3 a barrel (it averaged at $3.5 a barrel in the first nine months of FY14 versus $4.6 in first nine months of FY13).

Total under-recoveries for OMCs during the quarter rose sharply while the full compensation from government did not come. The sector’s under-recoveries increased to Rs 40,000 crore compared to previous quarters’ Rs 35,000 crore, primarily on an increase in LPG subsidy to Rs 520 a cylinder (Rs 417 a cylinder in second quarter) as global LPG prices increased, said Nitin Tiwari at Religare Capital Markets.

BPCL has absorbed Rs 4,163 crore of under-recoveries so far in FY14, despite almost 83 per cent of the burden already taken care by upstream companies and the government.  Thus, as BPCL saw its revenues rise to Rs 64,734 crore compared to Rs 61,757 crore in September 2013 quarter and Rs 62,340 crore in the year ago quarter, it reported losses on operating front. Ebitda loss stood at Rs 916 crore and net loss at Rs 1,089 crore.

Analysts at Antique observe that BPCL has posted superior H1FY14 earnings as compared to its peers due to better refining performance and inventory and debt management. Based on the traditional subsidy sharing practice of bailing out OMCs, analysts believe OMCs would be given full compensation. As a result, BPCL is expected to deliver FY14 earnings significantly above its peers. This coupled with presence in world-class upstream assets like Mozambique and Brazil, puts BPCL much ahead as an integrated oil and gas play.