BHARAT PETROLEUM CORPORATION

Transcription

1 RESULT UPDATE BHARAT PETROLEUM CORPORATION Multiple triggers India Equity Research Oil, Gas and Services Bharat Petroleum s (BPCL) Q1FY15 profit of INR12.0bn surpassed our INR6.7bn estimate due to INR5bn one-off forex gain and 7.5% YoY fall in under-recovery to INR5bn. Large past subsidy payments cut the company s debt burden 25% to INR150bn, reducing interest expense 63% YoY to INR1.95bn in the process. We believe BPCL enjoys multiple triggers: (1) diesel under-recovery has hit near-zero recently. If the government frees diesel, management believes marketing margins could double in the long term; and (2) Mozambique LNG and Yahoo (Brazil) developmental plans are underway (refer page 2 for management call takeaways). Maintain BUY with SOTP-based target price of INR697. GRMs down 17% YoY and 50% QoQ GRMs of BPCL s Kochi and Mumbai refineries fell 17% YoY to USD 3.4/bbl, while its Bina refinery s GRM dropped 24% YoY to USD6.1/bbl. Mumbai refinery earned a better GRM of USD3.91/bbl versus Kochi s USD2.75/bbl as the former commissioned the CCR unit in March. Margin is likely to improve further as the CCR unit ramps up from current utilisation level of 60%. Overall, the company s refining business continued to outperform other OMCs. Refining throughput at 5.34mmt was down 5% YoY and 12% QoQ. Mumbai GRM was USD3.91/bbl and Kochi was USD2.75/bbl. Marketing business: Green shoots visible The company s overall sales volume at 9.5mmt was up 1% QoQ and 2% YoY. Under recovery stood at INR5.0bn compared to INR5.4bn in Q1FY14. In the marketing business, while petrol sales jumped 10.1% YoY, diesel sales rose 2% YoY. BPCL currently earns a marketing margin of INR0.71/litre on diesel. Management believes that if diesel is freed, margin should settle down at similar level prevalent in neighboring countries of USD /bbl, which translates into INR /litre, i.e., double the current. Outlook and valuations: Diesel hike + E&P play; maintain BUY Full diesel deregulation will lead to lower interest costs and a potential doubling in marketing margin. We like BPCL s superior operational performance over other OMCs, investments in high-return refining capex and remain bullish on its E&P assets in Mozambique and Brazil (high potential SEAL basin). We maintain BUY/Sector Outperformer with SOTP-based target price of INR697. Financials (Standalone) (INR bn) Year to March Q1FY15 Q1FY14 YoY% Q4FY14 QoQ% FY14 FY15E FY16E Net revenues (10.7) 2, , ,528.1 EBITDA (76.1) Net profit (70.1) Diluted EPS (INR) (70.1) Diluted P/E (x) EV/EBITDA (x) ROAE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Edelweiss Securities Limited Outperformer Medium Underweight MARKET DATA (R: BPCL.BO, B: BPCL IN) CMP : INR 604 Target Price : INR week range (INR) : 650 / 256 Share in issue (mn) : M cap (INR bn/usd mn) : 436/ 7,125 Avg. Daily Vol.BSE/NSE( 000) : 1,708.3 SHARE HOLDING PATTERN (%) Current Q4FY14 Q3FY14 Promoters * MF's, FI's & BK s FII's Others * Promoters pledged shares (% of share in issue) : NIL PRICE PERFORMANCE (%) Stock Nifty EW O & G Index 1 month (4.2) 3.1 (2.1) 3 months months Jal Irani jal.irani@edelweissfin.com August 13, 2014

2 Oil, Gas and Services Q1FY15 conference call: Key takeaways Forex gains: Total forex gain of INR5.87bn, of which one-offs was a total INR5bn and the balance INR0.87bn was normal forex gain. The INR5bn one-off forex gain was further broken up into closing of swaps with RBI amounting to INR2bn and mark-to-market loss reversed on swaps of INR3bn. Bina refinery: Refining margin was USD6.1/bbl. Opex stood at USD3.8/bbl. USD0.4/bbl is EBITDA. The boiler will be commissioned in 3 months, after which there may be some reduction in opex and a greater reliability on continuous supply of power. Bina incurred a net loss of INR2.6bn. Given its losses, gearing has risen to The company is considering infusion of equity to address the problem. It is hopeful of making a cash profit in FY15 and hence a further cash infusion will not be required. Numaligarh refinery: GRM is USD9.41/bbl. Kochi refinery capex plan stands at INR160bn, of which INR15bn has been spent so far. Management expects commissioning by May 2016 and a corresponding USD2/bbl increase in GRMs. Marketing business: Volumes are up and losses have reduced. Marketing margins are more or less at last year s levels. Growth has just returned in fuel retailing business. BPCL made INR2bn trading gain during Q1FY15 versus a loss of INR4bn loss during Q4FY14. As per last revision, diesel under recovery was INR1.33 per litre. Diesel losses have reduced since then. The company currently earns a marketing margin of INR0.71/litre currently. It believes that if diesel is freed, margin should settle down at similar level prevalent in neighboring countries of USD /bbl, which translates into INR /litre. Debt depends on the inventory level. Inventory level and under-recoveries were lower in June quarter compared to March quarter. BPCL s total debt dipped from INR200bn to INR150bn. The company has a short-term debt of INR24bn, long-term debt of INR125bn and INR20bn cash in hand. Receivables from government are INR51bn. Capex: Expected capex for India operations is ~INR80bn for FY15. The company incurred capex of INR19bn in Q1FY15. Refinery GRMS: Mumbai was USD3.91/bbl and Kochi was USD2.75/bbl. Mumbai got a better crack spread compared to Kochi in the current quarter. Mumbai refinery commissioned the CCR unit towards the end of March, which improved its margin. CCR is currently operating at 60% utilisation. It has a capacity of 1.2mt. Upstream subsidiary, BPRL: The consortium plans a total investment in Mozambique of ~USD20bn, of which BPCL holds 10% stake. The consortium has approached for firming-up fiscal terms prior to incurring this significant investment. The necessary bill is awaiting parliamentary approval. Mozambique capex outlay is USD100mn in FY15. Investment in BPRL is USD1.3bn. Through its subsidiary, BPRL, BPCL is also in the process of drilling 3 appraisal wells in Brazil, the results of which will be available by year end. In the Yahoo block in Brazil, the consortium leader Anadarko is in the process of preparing developmental plans. 2 Edelweiss Securities Limited

3 Bharat Petroleum Corporation Chart 1: GRM of USD3.38/bbl in Q1FY (mmt) (1.0) (USD/bbl) Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Throughput (LHS) GRMs (RHS) Source: Company Table 1: Net under-recovery in Q1FY15 stood at INR5bn on controlled products (INR bn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Gross under-recovery Discount from upstream GoI subsidy Net under-recovery 79.6 (18.3) (2.2) (56.7) (36.5) 5.0 Upstream subsidy YTD (%) GoI subsidy YTD (%) Net under-recovery YTD (%) Table 2: SOTP valuation Base value (USD bn) Base value (INR bn) Source: Company Base value (INR/share) BPCL standalone refining (@ EV/EBITDA 5.5x) Equity value of Bina refinery (@ EV/EBITDA 5.5x) BPCL marketing (@ EV/EBITDA 5.5x) BPCL pipelines (@ EV/EBITDA 5.5x) Equity value of Mozambique (@ 50tcf, gas price 11% of JCC, 13% WACC) Equity value of Brazil (125mn $4/boe) EV of operating assets Non-current investments at 25% discount Cash & cash equivalents Debt net of advances CWIP after 100% haircut Net debt Equity value CMP (INR) 603 Return on CMP (%) 15.5 Source: Edelweiss research 3 Edelweiss Securities Limited

4 Oil, Gas and Services Chart 2: Overall share of under recoveries in different segments 1,933 1,546 (INR bn) 1, FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E Gasoline Diesel LPG Kerosene Chart 3: Net under recovery shared betn govt, upstream and downstream companies 2, (INR bn) 1,600 1, (USD / Barrel) 0 46 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E Government Upstream PSUs Downstream PSUs Brent (USD/bbl) Source: Edelweiss research 4 Edelweiss Securities Limited

5 Bharat Petroleum Corporation Financial snapshot (INR mn) Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E Net revenues 667, , ,720 (10.7) 2,600,605 2,542,642 2,528,138 Raw material costs 619, , ,621 (4.5) 2,399,542 2,342,470 2,324,987 Gross profit 48,223 49,690 (3.0) 99,099 (51.3) 201, , ,151 Employee expenses 7,903 8,314 (4.9) 7,910 (0.1) 28,964 31,281 33,783 Other expenses 25,119 32,010 (21.5) 27,612 (9.0) 91,238 91,497 93,206 EBITDA 15,201 9, ,577 (76.1) 80,862 77,395 76,162 Depreciation & amortization 5,572 5, ,189 (10.0) 22,468 24,807 26,028 EBIT 9,629 4, ,388 (83.2) 58,394 52,588 50,134 Other income 10,232 3, , ,687 13,726 12,868 Interest 1,948 5,253 (62.9) 2,048 (4.9) 13,591 10,269 8,856 Profit before tax 17,913 2, ,567 (69.9) 59,490 56,045 54,146 Tax 5, ,884 (69.5) 18,881 18,495 17,868 Core profit 12,163 1, ,684 (70.1) 40,609 37,550 36,278 Extraordinary items PAT 12,163 1, ,684 (70.1) 40,609 37,550 36,278 Diluted EPS (INR) (70.1) As % of net revenues Gross profit EBITDA Adjusted net profit Edelweiss Securities Limited

6 Oil, Gas and Services Company Description BPCL is a leading player in the Indian petroleum industry with operations in both refining and marketing segments. The company is venturing into E&P business through exploration assets in Mozambique and Brazil partnering Anadarko and Petrobras. BPCL has stakes in 21 E&P blocks worldwide. BPCL, along with its subsidiaries, owns three refineries with a combined refining capacity of 24.5 mmtpa, and has recently increased its refining capacity by adding a new refinery at Bina (6 mmtpa). Investment Theme BPCL s refining margins have exhibited less volatility compared to the other oil marketing companies. We expect global refining margins to improve led by capacity closures offsetting capacity additions. BPCL s recently commissioned Bina refinery is of higher complexity and will have higher refining margins. Discoveries in Mozambique and Brazil provide good opportunity for company to enhance its footprint in the E&P space and lower the impact of under-recoveries in the long run. It is also investing in a chemicals project in Kochi along with LG Chemicals which is expected to generate IRR in excess of 20%. Key Risks Increase in crude prices or INR depreciation will increase under-recovery. Further, high under-recovery increases debt and leads to higher working capital/interest expense. Regulatory change in the form of reduction in duty protection or pricing of refinery products on export parity basis will lower refining margins. Country risk in areas of its E&P operations, especially in Mozambique, where the industry ecosystem and regulations are still in a nascent stage. 6 Edelweiss Securities Limited

7 Bharat Petroleum Corporation Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector Brent Crude (USD/bbl) Under-recovery (INR bn) 1,610 1, % sharing by Govt % sharing by upstream % sharing by OMCs Company Refining Refining throughput (mmt) GRM (USD/bbl) Opex (USD/bbl) Marketing Export sales (mmt) Total domestic sales (mmt) Gasoline sales (mmt) Diesel sales (mmt) Normalised gross margin (INR/mt) 3,538 4,202 4,300 4,300 Pipelines Pipeline throughput (BTKM) Pipeline EBITDA (INR/mmt/km) Financial assumptions Average Interest rate (%) Gross debt (INR bn) Capex (INR bn) Cash conversion cycle (days) Income statement (INR mn) Net revenue 2,421,810 2,644,066 2,687,212 2,671,372 Materials costs 2,214,199 2,391,500 2,446,265 2,427,067 Gross profit 207, , , ,305 Employee costs 29,505 31,153 33,441 35,814 Other Expenses 111, , , ,691 EBITDA 66,723 93,590 88,138 87,800 Depreciation & Amortization 24,627 26,109 30,733 32,088 EBIT 42,096 67,480 57,406 55,711 Other income 15,290 13,998 12,862 12,259 Interest expenses 25,183 19,821 18,499 16,732 Profit before tax 32,203 61,657 51,768 51,239 Provision for tax 12,841 21,127 16,798 16,648 Net profit 19,362 40,530 34,970 34,591 Profit after minority interest 18,808 40,530 34,703 34,313 Shares outstanding (mn) Diluted EPS (INR) CEPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics Gross margin EBITDA margins EBIT margins Net profit margins Growth ratios (%) Revenues (0.6) EBITDA (5.8) (0.4) Net profit (14.4) (1.1) EPS (14.4) (1.1) 7 Edelweiss Securities Limited

8 Oil, Gas and Services Balance sheet (INR mn) As on 31st March FY13 FY14 FY15E FY16E Equity capital 7,231 7,231 7,231 7,231 Reserves & surplus 160, , , ,489 Shareholders funds 167, , , ,720 Minority interest (BS) 10,766 11,124 11,392 11,669 Short term debt 204, , , ,317 Long term debt 127, , , ,634 Borrowings 331, , , ,951 Deferred tax liability 16,059 10,279 7,378 4,821 Sources of funds 526, , , ,476 Total net fixed assets 321, , , ,036 Non current investments 22,518 13,528 13,528 13,528 Current Investments 52,180 46,659 30,571 20,665 Cash and equivalents 28,498 (2,691) (5,118) (8,096) Inventories 199, , , ,769 Sundry debtors 43,551 51,212 58,533 58,403 Loans and advances 36,096 40,186 42,508 42,595 Other current assets 91, ,517 74,542 57,811 Total current assets 399, , , ,482 Trade payable 89, , , ,911 Others current liabilities 180, , , ,323 Total current liabilities & 269, , , ,234 Net current assets (ex cash) 101,106 92,833 90,729 70,344 Uses of funds 526, , , ,476 Book value per share (INR) Free cash flow (INR mn) Net profit 18,808 40,530 34,703 34,313 Depreciation 24,627 26,109 30,733 32,088 Deferred tax (727) - (2,895) (2,610) Others 17, ,376 4,750 Gross cash flow 60,277 66,833 68,917 68,541 Less: Changes in WC 1,040 (8,272) (2,104) (20,385) Operating cash flow 59,237 75,105 71,021 88,927 Less: Capex 55,246 80,901 92, ,969 Free cash flow 3,991 (5,796) (21,881) (30,042) Cash flow metrics Operating cash flow 59,237 75,105 71,021 88,927 Investing cash flow (36,013) (52,491) (63,952) (96,803) Financing cash flow (7,989) (55,171) (8,830) 1,967 Net cash flow 15,235 (32,557) (1,761) (5,910) Capex (55,246) (80,901) (92,902) (118,969) Dividends paid (9,636) (15,053) (13,700) (13,466) Profitability & efficiency ratios ROAE (%) ROACE (%) Inventory day Debtors days Payable days Cash conversion cycle (days) Net Debt/Equity Operating ratios Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Diluted EPS (INR) Y-o-Y growth (%) (14.4) (1.1) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) Market Capitalisation 395, , , ,769 EV 623, , , ,296 Peer comparison valuation Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%) Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E Bharat Petroleum Corporation 7, Chennai Petroleum Corp Ltd Essar Oil 2, Hindustan Petroleum Corporation 2, Indian Oil Corporation 13, Reliance Industries 52, Median AVERAGE Source: Edelweiss research 8 Edelweiss Securities Limited

9 Additional Data Bharat Petroleum Corporation Directors Data S Varadarajan Chairman & Managing Director K K Gupta Director - Marketing B K Datta Director - Refineries S P Gathoo Director - HR B Chakrabarti Part Time Non-Official Director J R Varma Part Time Non-Official Director P H Kurian Non Executive, Independent Director Dr. Neeraj Mittal Non Executive Independent Director Auditors - TR Chadha & Co, K Varghese & Co *as per last annual report Holding Top10 Perc. Holding Perc. Holding Government of india Bpcl trust for inves 9.33 Life insurance corp 5.12 Hdfc asset managemen 3.63 Prudential plc 1.66 Hdfc life insurance 1.07 Norges bank investme 1.04 Norges bank investme 1.04 Uti asset management 1.03 Reliance capital tru 0.79 *in last one year Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available *in last one year 9 Edelweiss Securities Limited

10 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk Bharat Petroleum Corporation BUY SO M Cairn India HOLD SO M Essar Oil BUY SO H GAIL (INDIA) HOLD SP L Gujarat State Petronet BUY SP M Hindustan Petroleum Corporation BUY SO L Indian Oil Corporation BUY SO M Indraprastha Gas BUY SO M ONGC BUY SO L Petronet LNG REDUCE SU L Reliance Industries BUY SO M ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 10 Edelweiss Securities Limited

11 Bharat Petroleum Corporation Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Vikas Khemani Head Institutional Equities Nischal Maheshwari Co-Head Institutional Equities & Head Research Nirav Sheth Head Sales Coverage group(s) of stocks by primary analyst(s): Oil, Gas and Services Bharat Petroleum Corporation, Cairn India, Essar Oil, GAIL (INDIA), Gujarat State Petronet, Hindustan Petroleum Corporation, Indraprastha Gas, Indian Oil Corporation, ONGC, Petronet LNG, Reliance Industries Recent Research Date Company Title Price (INR) Recos 12-Aug-14 IOCL Modest performance; diesel deregulation holds the key; Result Update 12-Aug-14 HPCL GRM disappoints; Result Update 11-Aug-14 GAIL Margin and volume rout; Result Update 341 Buy 405 Buy 390 Hold Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * 1 stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period 11 Edelweiss Securities Limited

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