Higher inventory loss drag earnings August 14, 2017 Avishek Datta avishekdatta@plindia.com +91 22 66322254 Rating BUY Price Rs479 Target Price Rs553 Implied Upside 15.4% Sensex 31,449 Nifty 9,794 (Prices as on August 14, 2017) Trading data Market Cap. (Rs bn) 692.2 Shares o/s (m) 1,446.2 3M Avg. Daily value (Rs m) 1876.1 Major shareholders Promoters 55.79% Foreign 22.17% Domestic Inst. 7.05% Public & Other 14.99% Stock Performance (%) 1M 6M 12M Absolute 3.7 6.3 26.8 Relative 5.5 (4.6) 15.1 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 53.6 42.2 27.1 2019 63.0 47.3 33.2 Price Performance (RIC: BPCL.BO, BB: BPCL IN) (Rs) 600 500 400 300 200 100 0 Aug 16 Oct 16 Source: Bloomberg Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Strong operating performance hit by inventory loss: BPCL reported Q1FY18 results lower than estimates; EBITDA at Rs12.3bn (PLe: Rs21.1bn) and PAT at Rs7.4bn (PLe: Rs13.6bn). Operating profits were hit by higher than expected inventory loss of Rs13.6bn and other expenses of Rs33.3bn (+12%QoQ). We remain positive on OMCs as benign crude price outlook along with stable refining and marketing margins are likely to drive earnings. GRMs steady: BPCL s refining margins for Q1FY18 were at US$4.9/bbl (Q4FY17 at US$6.0/bbl) due to inventory loss of US$2.0/bbl. Refining margins came in lower to peers due to use of light crude at the Kochi refinery given ongoing stabilisation of expanded capacity. Refining throughput for Q1 was at 6.4MTPA (6.0MTPA in Q4) post maintenance shutdown at Mumbai refinery. Marketing volumes grows, but lower than industry: BPCL s Q1FY18 marketing profitability was hit by inventory loss of Rs7.3bn. For Q1, BPCL s diesel and petrol marketing volume growth was at 1.7% YoY and 9.7 YoY, respectively, lower than industry rate of 5.8% and 10.6%YoY, respectively, due to increased competition from private players. BPCL has more retail outlets on highways and is planning new strategy to limit market share loss. Gross marketing margins for diesel and petrol for Q1 were steady at Rs2.7/2.6/litre. Marketing earnings are expected to remain strong, going forward, due to healthy volume growth and stable margins. Maintain estimates, reiterate BUY : We maintain our estimates for FY18/19E. Reiterate BUY with a PT of Rs553 (unchanged) based on 12x FY19E. We also add the investments at 25% discount to market and add the value of E&P. Key financials (Y/e March) 2016 2017 2018E 2019E Revenues (Rs m) 1,878,146 2,012,507 2,163,529 2,527,487 Growth (%) (22.6) 7.2 7.5 16.8 EBITDA (Rs m) 129,371 135,125 121,415 139,812 PAT (Rs m) 80,889 95,070 77,575 91,152 EPS (Rs) 55.9 65.7 53.6 63.0 Growth (%) 68.3 17.5 (18.4) 17.5 Net DPS (Rs) 15.5 19.5 18.0 21.0 Profitability & Valuation 2016 2017 2018E 2019E EBITDA margin (%) 6.9 6.7 5.6 5.5 RoE (%) 32.0 30.8 21.5 22.1 RoCE (%) 16.2 14.6 11.5 11.3 EV / sales (x) 0.4 0.4 0.4 0.4 EV / EBITDA (x) 6.5 6.2 7.2 6.6 PE (x) 8.6 7.3 8.9 7.6 P / BV (x) 2.5 2.1 1.8 1.6 Net dividend yield (%) 3.2 4.1 3.8 4.4 Source: Company Data; PL Research Q1FY18 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Conference call takeaway Kochi project update: Management mentioned that the Kochi refinery expansion is on track and full benefits will be reflected from Q4FY18 when the secondary units operate at ~90%. When fully commissioned, management expects incremental benefit of US$2/bbl on full capacity and opex increase of US$0.5/bbl. Private completion impacting fuel demand growth: Management clarified that BPCL has lost market share to PSU peers. BPCL management remains confident of defending market share and is planning new marketing strategies to counter competitive threats. Capex guidance: BPCL expects capex of Rs78/85bn for FY18/19E. Subsidiaries record healthy GRM: For Q1, Bina refinery had profits of Rs1.46bn and GRMs were at US$8.9/bbl. The Numaligarh refinery had PAT of Rs3.7bn for Q1 and excluding excise duty benefits had GRMs of US$7.5/bbl. GST impact: BPCL expects GST impact of Rs10bn and is actively discussing with the state governments to include petroleum products in the GST regime. August 14, 2017 2
Exhibit 1: Q1FY18 Result Overview (Rs m) Y/e March Q1FY18 Q1FY17 YoY gr. (%) Q4FY17 QoQ gr. (%) Net sales 667,664 570,158 17.1 660,232 1.1 Inc/dec in stock 24,689 (24,097) NA (17,674) NA Raw material cons 171,590 147,458 16.4 182,067 (5.8) Staff cost 8,087 6,493 24.5 14,368 (43.7) Purchases 321,363 270,767 18.7 340,372 (5.6) Duties, taxes, etc 96,406 100,771 (4.3) 89,867 7.3 Other expenditure 33,278 29,574 12.5 29,109 14.3 Exp (655,413) (530,966) NA (638,110) NA Operating profit 12,250 39,192 (68.7) 22,123 (44.6) Interest (1,789) (1,111) NA (1,475) NA Depreciation (5,892) (4,315) NA (5,238) NA Other income 6,566 3,649 79.9 6,624 (0.9) Profit before tax 11,136 37,415 (70.2) 22,033 (49.5) Current tax (3,690) (11,210) NA (3,616) NA Profit after tax 7,446 26,205 (71.6) 18,417 (59.6) Source: Company Data, PL Research Exhibit 2: BPCL refining margin and volume details Q3FY16 Q4FY16 Q1FY16 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Refining volume (MT) 5.9 6.2 6.2 6.4 6.8 6.0 6.4 GRM ($/bbl) 7.7 6.3 6.1 3.1 5.9 6.0 4.9 Marketing volume (MTPA) 9.3 9.8 9.7 8.9 9.8 9.2 10.0 Source: Company Data, PL Research August 14, 2017 3
Income Statement (Rs m) Net Revenue 1,878,146 2,012,507 2,163,529 2,527,487 Raw Material Expenses 902,403 1,021,312 882,766 1,037,749 Gross Profit 975,743 991,195 1,280,763 1,489,738 Employee Cost Other Expenses 846,372 856,070 1,159,348 1,349,926 EBITDA 129,371 135,125 121,415 139,812 Depr. & Amortization 20,719 21,076 29,357 30,235 Net Interest (9,154) (13,514) (17,275) (18,444) Other Income 15,958 20,478 28,898 32,153 Profit before Tax 117,806 127,562 109,333 128,021 Total Tax 40,427 41,926 31,348 36,520 Profit after Tax 77,379 85,636 77,985 91,500 Ex Od items / Min. Int. (3,510) (9,434) 410 348 Adj. PAT 80,889 95,070 77,575 91,152 Avg. Shares O/S (m) 1,446.2 1,446.2 1,446.2 1,446.2 EPS (Rs.) 55.9 65.7 53.6 63.0 Cash Flow Abstract (Rs m) C/F from Operations 100,762 149,601 202,751 217,703 C/F from Investing (118,422) (120,295) (197,883) (222,889) C/F from Financing 29,488 20,270 58,080 30,431 Inc. / Dec. in Cash 11,828 49,576 62,947 25,246 Opening Cash 34,463 46,290 95,866 158,813 Closing Cash 46,290 95,866 158,813 184,058 FCFF 32,848 (151,196) (95) (73,944) FCFE 88,940 (114,600) 99,774 4,480 Key Financial Metrics Growth Revenue (%) (22.6) 7.2 7.5 16.8 EBITDA (%) 32.3 4.4 (10.1) 15.2 PAT (%) 68.3 17.5 (18.4) 17.5 EPS (%) 68.3 17.5 (18.4) 17.5 Profitability EBITDA Margin (%) 6.9 6.7 5.6 5.5 PAT Margin (%) 4.3 4.7 3.6 3.6 RoCE (%) 16.2 14.6 11.5 11.3 RoE (%) 32.0 30.8 21.5 22.1 Balance Sheet Net Debt : Equity 0.5 0.4 0.5 0.5 Net Wrkng Cap. (days) (54) (62) (96) (96) Valuation PER (x) 8.6 7.3 8.9 7.6 P / B (x) 2.5 2.1 1.8 1.6 EV / EBITDA (x) 6.5 6.2 7.2 6.6 EV / Sales (x) 0.4 0.4 0.4 0.4 Earnings Quality Eff. Tax Rate 34.3 32.9 28.7 28.5 Other Inc / PBT 13.5 16.1 26.4 25.1 Eff. Depr. Rate (%) 3.4 2.4 2.8 2.3 FCFE / PAT 110.0 (120.5) 128.6 4.9 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 280,336 336,432 384,591 441,548 Total Debt 266,268 302,864 402,733 481,157 Other Liabilities 35,496 69,296 94,392 131,485 Total Liabilities 582,100 708,592 881,716 1,054,189 Net Fixed Assets 546,426 659,624 827,966 1,020,477 Goodwill Investments Net Current Assets 35,674 48,968 53,751 33,712 Cash & Equivalents 123,653 159,249 222,381 247,769 Other Current Assets 262,335 257,953 236,522 253,576 Current Liabilities 350,313 368,235 405,153 467,633 Other Assets Total Assets 582,101 708,592 881,716 1,054,189 Quarterly Financials (Rs m) Y/e March Q2FY17 Q3FY17 Q4FY17 Q1FY18E Net Revenue 549,132 640,957 660,232 667,664 EBITDA 13,814 33,165 22,123 12,250 % of revenue 2.5 5.2 3.4 1.8 Depr. & Amortization 4,524 4,836 5,238 5,892 Net Interest (9,199) (4,162) (5,149) (4,777) Other Income 10,223 5,511 6,624 6,566 Profit before Tax 18,489 32,491 22,033 11,136 Total Tax 5,437 9,771 3,616 3,690 Profit after Tax 13,052 22,719 18,417 7,446 Adj. PAT 13,052 22,719 18,417 7,446 Key Operating Metrics Crude /bbl 47.6 49.0 55.0 60.0 US$/Rs 65.4 67.1 66.0 67.0 GRM (US$/bbl) 6.6 5.3 6.0 6.5 Refining volume (MTPA) 24.1 25.4 29.4 31.4 Net subsidy burden (Rs m) Source: Company Data, PL Research. August 14, 2017 4
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