Bharat Petroleum Corporation Ltd (BPCL), a government‐owned company operating in the refining and marketing segment. The company has also diversified into the petrochemical feedstock and exploration and production segments. Based on a consolidated FY12 P/E multiple of 12, the fair value for the company works out to Rs 691.

1. September 25, 2010
BHARAT PETROLUEM CORPORATION LTD Recommendations
SELL <= 1 year 1 - 2 yrs 2 - 5 yrs
Strong Buy
Bharat Petroleum Corporation Ltd (BPCL), a government‐owned company operating in
Buy
the refining and marketing segment. The company has also diversified into the Hold
petrochemical feedstock and exploration and production segments. Reduce
• Bina refinery is expected to be operational in October 2010. The high complexity Bina Sell
Strong Buy – Expected Returns > 20% p.a.
refinery would improve the overall complexity of BPCL refineries and would help improve Buy – Expected Returns from 10 to 20% p.a.
the Gross Refining Margins (GRMs). Hold – Expected Returns from 0 % to 10% p.a.
Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk
• It has recently discovered Oil and Natural Gas in the Wahoo field, offshore Brazil and Natural Sell – Returns < 0 %
Gas in the Rovuma Basin, Area I, offshore Mozambique.
• BPRL has entered the Shale Gas space and has acquired stake for farming two blocks in
Australia and would invest up to AUD 15 million for exploration and drilling funding.
• At the current price levels, the stock has factored for the upsides. Any reforms in respect to
Deregulation of Diesel prices or Clarity on the subsidy sharing mechanism is not likely in the STOCK DATA
BSE / NSE Code 500547 / BPCL
near or mid-term considering the political heat and inflationary heat. Any upside from the Bloomberg Code BPCL IN EQUITY
E&P sector is highly uncertain and would take time to accrue. No. of Shares (Mn) 362
Sensex / Nifty 19,942/5,991
• We expect BPCL’s revenues to grow at a CAGR of 4.6% over FY2010-12 to Rs 1333.4bn by PRICE DATA
FY2012. We further estimate that PAT would grow at a CAGR of 9.5% over FY2010-12 to Rs CMP Rs (22nd Sep' 10) 787.1
Beta 0.30
19.6bn in FY2012 from Rs 16.3bn in FY2010. Market Cap (Rs mn) 284,550
Based on a consolidated FY12 P/E multiple of 12, the fair value for the 52 Week High-low 815/ 488.2
Average Daily Volume 222,992
company works out to Rs 691 STOCK RETURN (%)
30D 3M 6M 1Y
Financial Snapshot BPCL 13% 43% 52% 41%
Projections (Rs Mn) FY08A FY09A FY10A FY11E FY12E Sensex 8% 12% 15% 18%
Nifty 8% 13% 15% 19%
Revenue 1,107,436 1,352,386 1,218,640 1,280,426 1,333,382
SHARE HOLDING PATTERN (%)
Y-o-Y Growth % 13.9% 22.1% -9.9% 5.1% 4.1% Promoter 54.9
EBIDTA 50,259 47,989 53,395 59,488 67,170 Institution 27.7
Y-o-Y Growth % -0.4% -4.5% 11.3% 11.4% 12.9% Non Institution 17.4
Total 100.0
PAT After MI 17,695 6,338 16,324 16,951 19,572
1 Year Price Performance (Rel. to Sensex)
Y-o-Y Growth % -17.5% -64.2% 157.6% 3.8% 15.5% 50
EPS Rs 47.9 16.0 42.5 50.2 57.6 Sensex BPCL
40
BVPS Rs 357.0 368.2 391.2 426.4 467.0
30
EBIDTA % 4.5% 3.5% 4.4% 4.6% 5.0%
20
NPM % 1.6% 0.5% 1.3% 1.3% 1.5%
ROE % 13.4% 4.3% 10.9% 11.8% 12.3% 10
PER x 15.7 13.7 0
P/B Ratio 1.8 1.7 -10
-20
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2. September 25, 2010
BUSINESS PROFILE
BPCL is an Oil and Gas major with focus on the downstream segments. BPCL operates two refineries at Mumbai and Kochi.
The Kochi refinery’s capacity was recently expanded by 2 Million Metric Tonne (MMT) to 7.5 MMT. BPCL with Oman Oil
Company has set up a grass root refinery with 9.1 Nelson Complexity Index of 6 MMT capacity at Bina which is expected to
be operational in October, 2010. BPCL has a controlling stake in Numaligarh Refinery Limited with a capacity of 3 MMT. The
company has upgraded its refineries to Euro IV which would improve GRMs. BPCL’s total refining capacity is 38.5 MMT.
BPCL plans to expand its
The company entered the upstream business in 2003 through its subsidiary Bharat Petro Resources Ltd (BPRL). BPRL has
refining capacity to
jointly acquired participating interests in 26 exploration blocks; of which 10 are in Brazil, 9 in India, 2 in Australia and UK and 50MMT by 2015.
1 each in Oman, Mozambique and East Timor. About 85% of the total acreage is offshore and rest is onshore. All blocks are
at various stages of exploration and discoveries have been made in one block in Brazil and Mozambique.
BPCL is present in liquefied natural gas (LNG) through a 12.5% stake in Petronet LNG. It entered the city gas distribution
(CGD) business with 22.5% stake in Indraprastha Gas (IGL). BPCL also has interests in other CGD projects such as Sabarmati
Gas (25% stake), Central UP Gas (22.5%) and Maharashtra Natural Gas (22.5%).In the LPG space, BPCL has a 25.8% market
share with 2,187 distributors and reaches 28 million households. In the retail segment, BPCL operates 8,691 petrol pumps &
plans to increase this to approximately 9000 by 2011. In the aviation segment, the company is present in 30 airports in India.
Market Sales Volume (MMT) Trend in Sales
Lubricants
1% 30.00 27.16 27.70
Aviation 25.79
LPG 25.00 23.45
3%
20.37 21.03 21.63
12% 19.86
20.00
Direct 15.00
22%
10.00
Retail
62% 5.00
0.00
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Sales Volume in MMT
Key Risks and Concerns…
Subsidy in respect to the
While petrol prices have been deregulated, the subsidy overhang remains with under recoveries on LPG, Kerosene and
under recoveries is
Diesel. Also, with no specific formula for subsidy sharing the concerns persist. Further rise in oil prices or depreciation of expected from the
Rupee will add to the subsidy burden. Decontrol of fuel prices will increase competition in the retail segment with the government in the
2QFY11 or 3QFY11
entry of private players. Reliance Industries and Shell already have some presence in the retail segment. The long
gestation and uncertainty in the E&P segment would add to the concerns and the revenues from this segment could take
time to accrue. Also, with domestic airlines bleeding heavily have large outstanding dues with Oil Companies and this can
affect BPCL going ahead.
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3. September 25, 2010
BUSINESS PERFORMANCE
BPCL sales for 1QFY11 rose 34% to Rs 342.12bn compared to corresponding previous year period while bottomline
of the company turned to losses of Rs 17.18bn. The bottom line was adversely affected due to higher crude oil and
product prices which could not be fully passed on to the consumers. Earlier part of the under recoveries was Depreciation rose 73% to Rs
financed by government in the form of oil bond or cash which was missing in the current quarter. Foreign exchange 4.01bn which includes Rs
1.56bn on account of LPG
losses were Rs 3.38bn against gains of Rs 2.33bn in Q1FY'10. The Average Gross Refining Margin during the quarter
cylinders depreciated at
stood at USD3.57 per barrel compared to USD3.17 per barrel. Discounts received from upstream companies stood at 100%.
Rs 15.49bn for the quarter ended June 2010 compared to Rs 1.57bn in the corresponding previous year period.
Annual Revenues & Margins Quarterly Performance
1600 6% 450 20%
1400 400
5% 15%
350
1200
Revenues (Rs bn)
Revenues (Rs bn)
Margins(%)
300 10%
Margins(%)
1000 4%
250
800 3% 5%
200
600 150 0%
2%
400 100
-5%
1% 50
200
0 -10%
0 0%
Revenue (Rs mn) PAT Margins EBITDA Margins
Net Revenue (Rs mn) EBITDA Margins
Peer Group Comparison
Revenue EBIDTA PAT Margin ROE P/E P/B CMP FV
Companies
(Rs. mn) Margin (%) (%) (%) (x) (x) (Rs.) (Rs.)
BPCL 1,218,640 4% 1% 11% 18.5 2.0 787 10
HPCL 1,087,372 4% 1% 26% 14.8 3.9 540 10
IOC 2,693,663 7% 4% 19% 10.8 2.1 434 10
RIL 1,920,919 17% 8% 12% 21.0 2.6 1019 10
* FY10 consolidated figures
Peer Comparison
BPCL operates at margins comparable to its peers. However BPCL trades at the higher P/E compared to its peers.
BPCL commands a premium compared to the peers on the back of diversified revenue stream and better gearing. The stock has given 43%
return since the partial fuel
However at the current price has factored BPCL's capacity expansion initiatives in its existing refineries, initial
price deregulation.
successes in exploration and production in South American and African waters, commencement of the high-
complexity Bina refinery (full commissioning expected soon), and recent foray into shale gas fields in Australia.
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4. September 25, 2010
VALUATION
We expect BPCL’s revenues to grow at a CAGR of 4.6% over FY2010-12 to Rs 1333.4bn by FY2012. We further
Based on a consolidated
FY12 P/E multiple of 12, the
estimate that PAT would grow at a CAGR of 9.5% over FY2010-12 to Rs 19.6bn in FY2012 from Rs 16.3bn in
fair value for the company
FY2010. works out to Rs 691
Based on a consolidated FY12 P/E multiple of 12, the fair value for the company works out to Rs
691
We recommend a ‘SELL’ rating on the stock.
Financial Analysis and Projections
Particulars (Rs Mn) FY08A FY09A FY10A FY11E FY12E
Net Revenue 1,107,436 1,352,386 1,218,640 1,280,426 1,333,382
Other Income 14,566 14,697 23,652 17,450 23,772
Total Income 1,122,002 1,367,083 1,242,292 1,297,877 1,357,154
Operating Expenditure 1,071,743 1,319,094 1,188,897 1,238,389 1,289,984
Depreciation 12,921 12,617 14,446 16,860 19,801
EBIT 37,338 35,372 38,949 42,629 47,368
EBIT Margin (%) 3.4% 2.6% 3.2% 3.3% 3.6%
Interest 7,149 24,043 11,247 13,649 14,022
Profit Before Tax 30,189 11,329 27,703 28,980 33,346
Less: Tax 11,064 4,088 10,503 10,867 12,573
Profit After Tax 19,125 7,241 17,200 18,113 20,773
Minority Interest 1,430 904 876 1,162 1,201
PAT After MI 17,695 6,338 16,324 16,951 19,572
PAT Margin (%) 1.6% 0.5% 1.3% 1.3% 1.5%
ROE (%) 13.4% 4.3% 10.9% 11.8% 12.3%
EPS (Rs) 47.9 16.0 42.5 50.2 57.6
BVPS (Rs) 357.0 368.2 391.2 426.4 467.0
Valuation Ratios (x) FY11E FY12E
P/E 15.7 13.7
P/B 1.8 1.7
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5. September 25, 2010
Board of Directors
Director Name Current Position Description
Shri. S. Radhakrishnan has been appointed as Executive Chairman of the Board, Managing Director, Director - Marketing of Bharat
Petroleum Corporation Ltd effective August 19, 2010. He is a B.Tech (Mech.) from Indian Institute of Technology, Madras and M.B.A.
Shri. S. Radhakrishnan Executive Chairman from Indian Institute of Management, Bangalore. He has wide ranging experience in marketing of petroleum products. Prior to
appointment as Director (Marketing), he was holding the position of Managing Director in Bharat Shell Ltd. He is also Director on the
Boards of Kochi Refineries Ltd. and Numaligarh Refinery Ltd., Indraprastha Gas Ltd., Sabarmati Gas Ltd. and Bharat Shell Ltd.
Shri. Sudhir K. Joshi serves as Finance Director, Whole-Time Director of Bharat Petroleum Corporation Ltd. He is a member of the
Institute of Chartered Accountants of India and M.B.A. from the University of Hull, United Kingdom. Prior to his appointment as Director
(F), he was responsible for the overall fund management, risk management, corporate accounts and budgeting. He was also closely
associated with key initiatives undertaken by the Company including implementation of SAP and drawing up of the Corporate Credit
Policy and Commodity Risk Management Policy. Besides, Shri Joshi was closely associated with key initiatives impacting the Oil
Finance Director,
Shri. Sudhir K. Joshi Industry in India. He was a member of the Study Group formed for the purpose of preparing a Long Term Perspective Plan for the Oil
Whole-Time Director
Industry in India which had come out with the report titled ‘Hydrocarbon Perspective:2010 – Meeting the Challenges. He was awarded
the ‘Business Today CFO’ under the category “CFO in a PSU”. for the year 2008-09. In addition to BPCL, he also holds the position of
Director in Numaligarh Refinery Ltd., Bharat Oman Refineries Ltd, Bharat PetroResources Ltd., Bharat PetroResources JPDA Ltd. and
Bharat Stars Services Pvt. Ltd. Shri. S.K.Joshi was appointed as Director (Finance) on March 8, 2006. He is liable to retire by rotation at
the ensuing AGM and being eligible, offers himself for re-appointment.
Shri. Seetharaman Mohan serves as Director - Human Resources, Whole-Time Director of Bharat Petroleum Corporation Ltd. He is a
Director - Human Mechanical Engineer from Birla Institute of Technology & Science, Pilani and M.B.A. from Indian Institute of Management, Bangalore.
Shri. Seetharaman Mohan Resources, Whole- Prior to being appointed as Director (Human Resources), he has held various key positions in Human Resource Development,
Time Director Marketing, Supply & Distribution and Engineering & Projects. In addition to BPCL, he is a Director on the Boards of Petronet India Ltd
and Petronet CCK Ltd. He is a British Council Scholar and has also attended programmes at Stanford and Kellogg, U.S.A.
Shri. Raj Kishore Singh serves as Director - Refineries, Whole-Time Director of Bharat Petroleum Corporation Ltd. He is a Mechanical
Engineer and has held various assignments, both in the Refinery and Marketing divisions. He has attended a Management
Development Programme at IIM, Ahmedabad, Materials Management Programme at ASCI, Hyderabad and Logistics Management
Director - Refineries, Course at University of Tenesse in U.S.A. He has also headed a group constituted for transfer of technology of LPG equipment from
Shri. Raj Kishore Singh
Whole-Time Director Denmark / Italy and he was closely associated with the World LPG Association as an active member of their subcommittees. In addition
to BPCL, he also holds the position of Director in Numaligarh Refinery Ltd., Bharat Oman Refineries Ltd. and Bharat PetroResources Ltd.
Shri R. K. Singh was appointed as Director (Refineries) on March 8, 2006. He is liable to retire by rotation at the ensuing AGM and being
eligible, offers himself for re-appointment.
Shri. Alkesh Kumar Sharma is Director of Bharat Petroleum Corp Ltd., since June 30, 2010. He is an Secretary (Investment Promotion),
Government of Kerala, is a senior IAS officer. In addition to being on the Board of BPCL, he also holds Directorship in other companies
Shri. Alkesh Kumar Sharma Director including Kerala State Industrial Development Corporation Ltd, Geojit BNP Paribas Financial Services Ltd, Brahmos Aerospace
Thiruvananthapuram Ltd, Infrastructures Kerala Ltd, Indian Rare Earths Ltd Kerala Minerals & Metals Ltd, etc. The Company has received
a notice under Section 257 of the Companies Act, 1956, from a Member proposing his name as Director of the Company.
Prof. S. K. Barua serves as Part-Time Non-Executive Independent Director of Bharat Petroleum Corporation Ltd. He is an M.Tech in
Industrial Engineering and Operations Research and holds a Doctorate in Management. He joined the faculty of Indian Institute of
Management, Ahmedabad in 1980. His specific areas of interest include Capital Market, International Finance, Operations Research,
Part-Time Non- Decision Support Systems, Management Information & Control System and Corporate Financial Management. He is a visiting professor
Prof. S. K. Barua Executive to academic institutions in the USA, Netherlands, Singapore & Cyprus and has authored a number of books and case studies in
Independent Director Management. He is a consultant to many public and private organisations in the manufacturing, banking and financial services sectors.
Besides, he has handled various assignments as Advisor to Reserve Bank of India, FICCI and the Mumbai and National Stock Exchanges.
In addition to BPCL, he holds the Directorship in a number of Companies i.e., Coal India Ltd., Paras Pharmaceuticals Ltd., Torrent Power
Ltd. etc.
Prof. N. Venkiteswaran Director Prof. N. Venkiteswaran currently serves as a director on the board of Bharat Petroleum Corporation Ltd.
Shri. Pradeep Kumar Sinha serves as Part-time Non-Executive Director of Bharat Petroleum Corporation Ltd . He is additional Secretary
Part-Time Non-
and Financial Advisor, Ministry of Petroleum & Natural Gas, is a senior IAS officer belonging to the1977 Batch of U.R Cadre. He is a
Shri. Pradeep Kumar Sinha Executive
postgraduate in Economics from Delhi School of Economics and M. Phil in Social Sciences and has a Masters Diploma in Public
Independent Director
Administration. In addition to BPCL, he holds Directorship in Indian Oil Corporation Ltd. and Hindustan Petroleum Corporation Ltd.
Shri. I.P.S Anand Director Shri. I.P.S Anand currently serves as a director on the board of Bharat Petroleum Corporation Ltd.
Shri. Haresh. M. Jagtiani Director Shri. Haresh. M. Jagtiani currently serves as a director on the board of Bharat Petroleum Corporation Ltd.
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