Bharat Petroleum Corporation Ltd Speeding Ahead BSE Code 5547 NSE Code BPCLEQ Bloomberg Code BPCL@IN Face Value 1 CMP Rs 342 Market Cap Rs 12bn (as on August 2th 24) Share Holding Pattern 3% 1% 14% 1% 6% Govt. of India Banks, FIs, Insu Cos, Private Corporate Bodies Share Price Chart 66% Mutual Funds and UTI FIIs Indian Public Industry Background The Indian economy bounced back during 23-4 and registered a handsome 8.2% growth in GDP. The robust GDP growth led to 3.4% increase in petroleum products consumption at 17.7mmt as against 14.2mmt in the previous year. The productwise consumption break-up is as follows: Products 23-4 22-3 Growth (%) HSD 37.2 36.6 1.6 ATF 2.5 2.2 13.6 Bitumen 3.4 2.9 17.2 LPG 9.3 8.3 12. Kerosene 1.2 1.4 (1.9) Figures in mmt (million metric ton) The regulation on parallel marketing of kerosene saw HSD consumption growing at a healthy rate in later half of the fiscal, even registering a double digit growth in the last quarter of the fiscal. Interestingly, HSD consumption growth was negative in first half of the FY4. Automobile boom led to a growth of 5.2% in MS consumption, whereas Naphtha sales dropped by about 3% due to increasing acceptance of natural gas in place of naphtha. The domestic refinery capacity in fiscal 23-4 increased to 118mmt from 115mmt in FY3. All the refineries put together recorded a throughput of 121.77mmt thus achieving a 13% capacity utilization. Export of petroleum products jumped 56% in US$ terms. Export of ATF, HSD and MS grew 138%, 9% and 27% respectively. The fiscal saw unabated rise in crude prices, particularly in later half of the year. The average Brent crude oil prices increased to US$29/bbl in FY4 as against US$27/ bbl in the FY3. However, the increase in product price was higher than the increase in crude price, thereby leading to improved refiners margins across the world. The fiscal also saw entry of private and foreign players viz Reliance, Essar and Shell in retail business, which is expected to witness major restructuring in the delivery mechanism to the consumers. Another important event in the industry was commissioning of first LNG (Liquified Natural Gas) terminal by Petronet LNG Ltd, the company promoted by oil PSUs and Indian financial institution for import and regassification of LNG. Natural gases are environment friendly and are expected to replace a major quantum of industrial liquid fuels in the days to come. August 25, 24 1
Government Policies During first week of August the Government came out with a guideline on petroleum product pricing. Under the mechanism the oil marketing companies (OMCs) will be given autonomy to change prices within a band. The prices of MS and HSD will be based on mean of last three months and last 12 months average CIF prices of respective products. The OMCs can change prices within 1% of the price so arrives at and for change beyond this band the OMCs have to take permission from the Oil ministry. This will help OMCs to stem downward pressure on marketing margins, and partially set-off losses on account of under-recovery on LPG and kerosene subsidy. The recent cut in custom and excise duty on petroleum products by the Government will put pressure off the marketing margins of the OMCs. The cut in custom duty on petroleum products will reduced refinery margins and will affect standalone refinery the most. However with the fundamentals in favor of refineries, the duty cut will not have any severe impact on their balance sheet. The integrating company will not have any impact, as the lower refinery margins will be setoff against increased marketing margins. The ONGC and GAIL will be least affected, as there is no duty cut on crude oil and duty cut on LPG will not have any material impact, as LPG is a small part of their business. August 25, 24 2
Company Background The company is a major downstream oil company in the domestic market with turnover of Rs534bn and PAT of Rs16.9bn in FY4. It commands about 22% of retail market share, despite having 17% of nameplate refining capacity inclusive of its subsidiary. Businesses Refinery The company has an installed refining capacity of 6.9mmtpa based on processing of neat Middle East crude, which is to be increased to 12mmtpa by the end of the FY5 with investment of Rs183bn. The refinery processed 8.76mmt of crude during the year and registered gross refinery margins (GRM) of US$4.64/bbl as against US$3.71/ bbl in FY3. The high GRM was achieved despite reduction in Mumbai High crude supply. Exhibit 1: Source of Crude Oil in mmt 1 mmt 8 6 4 2 6.32 5.92 5.18 5.48 4.22 2.55 2.74 3.59 3.23 4.54 FY FY1 FY2 FY3 FY4 Imported Bombay High To overcome the reduced availability of Mumbai high crude the company has started scouting for new types of crude oil for enhancing its crude basket which already include 61 kinds of crude. Exhibit 2: Production in mmt mmt 9 8 7 6 5 4 3 2 1 1.42 1.59 1.62 1.5 1.73 4.6 4.13 4.23 4.23 4.7 2.41 2.48 2.43 2.48 2.46 FY FY1 FY2 FY3 FY4 Light Distillates Middle Distillates Heavy Distillates August 25, 24 3
Retail BPCL is the second largest retailer in the country. Retail accounts for 6% of the total sales. It is the market leader in premium fuel category, with its brand Speed accounting for 49% of the market share with sale of.241mmt. It sold 8.9mmt and 1.51mmt of HSD and kerosene respectively during the year. Overall it sold 12.5mmt of fuel through its outlet as against 11.88mmt in FY3. The company added 739 outlets to its network including re-sitement of 63 retail outlets, thus adding 2 retail outlets per day and taking its retail outlet counts to 553 in FY4. The company has highest throughput per retail outlet in the industry of 2kl (kiloliters). Exhibit 3: Market sales Volume mmt 25 mmt 2 15 1 5 1.43 1.61 1.79 2.3 2.33.49.51.51.52.57 5.21 5.33 5.2 5.3 5.25.11.11.11.12.11 11.44 11.79 11.54 11.89 12.11 FY FY1 FY2 FY3 FY4 Retail Lubes Direct Aviation LPG Industrial and commercial (I&C) Sales volume in this segment at 5.27mmt was slightly less than the last year s, which was at 5.3mmt. However gross margins increased from Rs85/ton in FY3 to Rs95/ ton in FY4. During the year, the company also forayed into gas marketing through Petronet LNG Ltd. Lubricants Lubricants sales increased by 7% to Rs6.8bn during the year and thereby increasing its market share by.2% amongst PSU players. The company adopted multi-pronged strategy eg direct marketing, institutional sales (railways, defense) and tying up with OEMs (original equipment manufacturers) like Hero-Honda, which helped company achieve sustainable growth rate. August 25, 24 4
LPG The LPG business registered 14.67% increase in sales volume as against industry average of 11.63%. With aggregate sales volume at 2.33mmt, the company commands 25.8% of market share catering to 19.4m customers through 1922 distributors across the country. Aviation The aviation business clocked volume of.53mmt thus registering a growth of 9.25% during the year. It has tied up with Shell Aviation, which will help the company to tab Shell s international customers in India. Subsidiaries and Associated Companies Numaligarh Refinery Ltd (NRL) BPCL holds 62.96% of the paid-up equity in NRL. NRL has the nameplate refinery capacity of 3mmtpa, whereas its throughput was 2.2mmt in FY4 as against 1.88mmt in FY4. It recorded a turnover of Rs32.2bn (Rs28.5bn) and PAT of Rs2.14bn (Rs1.7bn) in the FY4. Kochi Refineries Ltd (KRL) BPCL owns 54.81% of the paid-up equity of the KRL. The refinery has total installed refining capacity of 7.5mmtps. The KRL s refining capacity is to be increase by 2.5mmtpa with the investment of Rs18bn. The company achieved a turnover of Rs115.1bn (Rs15.9bn) and PAT of Rs5.5bn (Rs4.5bn) during the year. Its EPS stands at Rs4.9in FY4 as against Rs32.93 in FY3. Bharat Shell Ltd It is a joint venture with Shell of Netherlands to market Shell branded lubricants. The JV recorded a turnover of Rs2.68mn (Rs2.46mn), however its PAT fell to Rs5.16mn (Rs62.86mn) due to rise in Base Oil prices and reduction in other income. Petronet India Ltd (PIL) It s a joint venture, where BPCL hold 16% of the equity with investment of Rs16mn. The company was formed to provide impetus in the development of pipeline network throughout the country. The company registered a revenue of Rs9.31mn (Rs44.5mn) and a net loss of Rs43.88 in FY4 as against net profit of Rs1.8mn in FY3. August 25, 24 5
Petronet CCK Ltd (PCCKL) It s a joint venture between BPCL and PIL, where BPCL owns 26% equity with an investment of Rs26mn. The PCCKL owns Kochi-Karur pipeline. The company registered turnover of Rs39.8mn (146mn) and cash profit of Rs24.7mn during the year as against cash loss of Rs15.6mn in FY3. Petronet LNG Ltd (PLL) PLL, a joint venture promoted by BPCL, IOC, ONGC and GAIL which hold 12.5% equity each, was incorporated for importing LNG and setting up LNG terminals at Dahej having a 5mmtpa capacity and another at Kochi to supply natural gas. Indraprastha Gas Ltd (IGL) IGL a joint venture set-up with GAIL for supply of CNG (compressed natural gas) to the household and automobile sector in Delhi. BPCL invested Rs315mn to acquire 22.5% equity in the company. The company clocked a turnover of Rs4.9bn (Rs3.5bn) and PAT of Rs8219mn (trs539.8mn). August 25, 24 6
Financial Analysis - Performance highlights of the last five years Particulars FY FY1 FY2 FY3 FY4 CAGR (Rs in mn) (%) Sales & Other Income 358,911 471,532 425,597 475,844 529,828 1.2 % yoy - 31.4 (9.7) 11.8 11.3 - EBITDA 17,377 2,332 21,144 27,24 33,16 17.4 % yoy - 17. 4. 28.7 21.4 - Interest 1,854 2,556 3,66 2,459 1,5 (13.2) PBT 9,369 11,131 13,268 19,935 26,355 29.5 PAT 7,17 8,327 8,498 12,5 16,946 24.7 % yoy - 18.7 2.1 47.1 35.6 - Export 5,73 8,697 6,551 11,99 13,192 23.18 EPS 23.39 27.76 28.33 41.67 56.49 24.7 Reading Between the Lines Sales and Other Income The company saw its net sales increasing by 11% to Rs482.5bn in FY4 as against Rs435.7bn in FY3 on account of better product mix (in favor of value added products eg LPG, ATF), higher realization and 2.6% increase in volumes. Other income increased by 35% to Rs4.7bn in FY4 on account of foreign exchange gain to the tune of Rs637.9mn during the year. Over the last decade sales and other income together registered a CAGR of 16.52%. Exhibit 4: Sales and Other Income over the last 1 years Rs in mn 6 5 4 3 2 1 5 4 3 2 1-1 -2 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2-1 21-2 22-3 23-4 (%) Sales& Other Income Growth Rate August 25, 24 7
EBITDA During the FY4, EBITDA increased by 17.4% yoy to Rs33bn as against Rs27.2bn in FY3. Over the last decade EBITDA saw a CAGR of 17.7%. During the last year company s crude purchase cost declined by 7.3%, as the company entered into long term contract with suppliers. Appreciation in Rupee vis-à-vis USD and decline in the ratio of costly Mumbai High crude were other reason for decline in crude cost. Further ONGC had to offer discount on purchase made by the company under the subsidy (on LPG and kerosene) sharing mechanism as devised by the Government. Exhibit 5: Crude Mix and Cost 12, 1, Rs in mn 8, 6, 4, 34,589 3,528 61,177 38,445 2, 28,389 33,166 34,74 5,429 - FY1 FY2 FY3 FY4 Imported Indigenous Exhibit 6: EBITDA over the Last Decade Rs in mn 35 3 25 2 15 1 5 35 3 25 2 15 1 5 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2-1 21-2 22-3 23-4 (%) EBITDA Growth Rate August 25, 24 8
Bottomline PAT increased by a whopping 35% yoy to Rs16.9bn in FY4 as against Rs12.5bn in FY3, on back of increased refinery margins, which was at US$4.64/bbl and reduced input cost. Appreciating Rupee during the fiscal and discount offered to the company on crude purchase from the ONGC under the subsidy sharing mechanism led to reduced crude prices. The PAT registered a CAGR of 21.57% over the last decade. Exhibit 7: PAT over the decade Rs in mn 18 16 14 12 1 8 6 4 2 5 4 3 2 1-1 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2-1 21-2 (%) 22-3 23-4 PAT in Rs mn Growth Rate Exhibit 8: Profitability Ratios (%) 45 4 35 3 25 2 15 1 5 FY2 FY3 FY4 OPM (%) PAT % ROCE RONW August 25, 24 9
Exhibit 9: EPS and DPS 6 5 56.4 4 43.67 Rs 3 2 23.39 27.76 28.33 1 15 17.5 11 6.25 7.5 FY FY1 FY2 FY3 FY4 DPS EPS Working Capital Management The company s working capital management improved dramatically from a net working capital position of Rs6bn in FY2 to a negative working capital of Rs686mn in the FY4. The prime reason behind this development was steep increase of 68% in creditors over the last three years. At the same time all the turnover ratios registered declined in FY4 in relation to the FY3, thereby indicating overall improvement in working capital position. Exhibit 1: Turnover Ratios 7 6 5 Days 4 3 2 1 FY2 FY3 FY4 Debtors days Inventory days Creditors days August 25, 24 1
Solvency Parameters Exhibit 11: Debt/Equity Ratio over the last 1 years D/E Ratio 1.2 1..8.6.4.2. 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2-1 21-2 22-3 23-4 The D/E ratio has declined consistently after touching its highest level in the year 2-1, though it did not breach the crucial 1:1 level. As a result interest costs have also declined, though in a volatile fashion. Similarly current ratio have remain stable at 1:1 level. Thus all the parameters indicate towards healthy fiscal situation. August 25, 24 11
Outlook Refinery The company is expanding its refinery capacity from existing 6.9mmtpa to 12mmtpa by the end of FY5. Though, we have surplus refinery capacity, the strong refiners margin prevailing throughout the world is making refinery attractive, even if the company has to export its surplus. Despite the recent cut in custom duties on petroleum products, refineries are expected to register high GRMs on back of continued favorable crude/ product prices, which augurs well for the company. Retail With the entry of new players and consequent increase in competition the industry dynamics will take a structural shift. The future would involve uncertain margins, change in dealer-distributor loyalty, high customer expectations and competition for experienced manpower. However, the company s scale and its reputation as an innovator - be it in marketing or new product launches - it will able to maintain its leadership position (in terms of throughput per outlet, which is at 2kl) in retail business. The company is expected to set-up 7 retail outlets during the FY5, which help company consolidate its marketing operation and will also act as an entry barrier for upcoming private and foreign players. Others During the FY4 the company commissioned its pipeline extension from Manmad to Indore, and is planning to extend it to Delhi. The pipeline is being developed on a common carrier principle, which will help company diversify earning streams. The shift towards NG/LNG as cheaper alternate to liquid fuels like naphtha/furnace oil is a cause of concern on two counts, first loss of market sales and second, creation of surplus within the country. The company s definite but small step towards vertical integration will help stabilize volatility in its earnings and secure its input requirements. The company is also exploring farming in opportunities, where it will take a stake in a developed oil field, thus avoiding considerable risk involved in the exploration business. The company is also eyeing lucrative city gas distribution business, which offer great potential considering legislative move towards making all public transport run on cleaner and cheaper CNG (compressed natural gas). It already has a presence in this business through joint ventures eg Mahangar Gas, Indraprastha Gas. August 25, 24 12
Income Statement Period FY2 FY3 FY4 (Rs in mn) (12) (12) (12) Net Sales 358,295 435,695 482,543 Operating expenses (339,751) (412,26) (453,86) Operating profit 18,544 23,668 28,683 Other income 2,654 3,465 4,669 PBIDT 21,198 27,134 33,352 Interest (366) (2459) (15) Depreciation (481) (489) (5612) Profit before tax (PBT) 13,321 19,865 26,69 Tax (477) (7435) (949) Profit after tax (PAT) 8,552 12,43 17281 Extraordinary / prior period items (53) 7.21 (335.25) Adjusted profit after tax (APAT) 8,498 125 16946 Balance Sheet Period FY2 FY3 FY4 (Rs mn) (12) (12) (12) Sources Share Capital 3, 3, 3, Reserves 36,974 44,474 55,497 Net Worth 39,974 47,474 58,497 Loan Funds 38,487 32,859 26,897 Def Tax liability 6,989 7,466 8,224 Total 85,45 87,798 93,618 Uses Gross Block 92,86 99,695 111,451 Accd Depreciation (41,27) (45,689) (51,12) Net Block 51,6 54,5 6,331 Capital WIP 4,416 9,618 14,77 Total Fixed Assets 56,16 63,624 74,47 Investments 23,394 21,62 19,77 Total Current Assets 55,552 83,2 83,415 Total Current Liabilities (49,512) (79,946) (84,11) Net Working Capital 6,41 3,74 (686) Intangible Asssets 38 127 Total 85,451 87,798 93,618 August 25, 24 13
Cash Flow Statement Period FY3 FY4 (Rs mn) Net profit before tax and extraordinary items 19,865 26,69 Depreciation 4,89 5,612 Interest expense 2,459 1,5 Interest income (1,79) (747) Dividend income (419) (1,144) Operating profit before working capital changes 25,636 31,461 Add: changes in working capital (Inc)/Dec in (Inc)/dec in sundry debtors 1,41 218 (Inc)/dec in inventories (14,915) 1,176 (inc)/dec in other current assets 1 9 Inc/(dec) in sundry creditors 28,64 1,849 Inc/(dec) in other current liabilities 1,83 2,36 Net change in working capital 16,92 5,558 Cash from operating activities 42,556 37,19 Less: Income tax (7,435) (9,49) Inc/Dec in Def Tax Asset/liability 477 758 Net cash from operating activities 35,597 28,367 Extraordinary inc/(exp) 7 (335) Cash Profit 35,667 28,32 Cash flows from investing activities (Inc)/Dec in fixed assets (12,417) (16,395) (Inc)/Dec in intangible asset (38) (89) (Inc)/Dec in Investments 2,332 1,292 Interest received 1,79 747 Dividends received 419 1,144 Net cash from investing activities (8,625) (13,31) Cash flows from financing activities Inc/(Dec) in debt (5,629) (5,961) Direct add/(red) to reserves () () Interest expense (2,459) (1,5) Dividends (5,) (5,923) (inc)/dec in loans & advances (1,657) (2,274) Net cash used in financing activities (23,745) (15,28) Net increase in cash and cash equivalents 3,297 (477) Cash at start of the year 3,445 6,743 Cash at end of the year 6,743 6,266 Cash at the end of the year as per B/S 6743 6266 August 25, 24 14
Ratios Period FY2 FY3 FY4 (12) (12) (12) Per share ratios EPS (Rs) 28.3 41.7 56.5 Div per share 11. 15. 17.5 Book value per share 133.2 158.2 195. Valuation ratios P/E 12. 8.2 6. P/BV 2.6 2.1 1.7 EV/sales.4.3.3 EV/ PBIT 8.4 5.7 4.4 EV/PBIDT 6.5 4.7 3.7 Profitability ratios OPM (%) 5.2 5.4 5.9 PAT % 2.4 2.9 3.5 ROCE 27. 33.8 39.1 RONW 21.3 26.3 29. Liquidity ratios Current ratio 1.1 1. 1. Debtors days 1. 7.1 6.2 Inventory days 29.7 36.9 32.4 Creditors days 45.6 61.5 56.9 Leverage ratios Debt / Total equity.96.69.46 Component ratios Raw material 18.5 22.7 19.2 Staff cost 1.7 1.5 1.4 Other expenditure 7.1 6.1 5.4 Payout ratios Dividend Payout Ratio 38.8 4. 35. Dividend (Rs in mn) 33 45 525 Total dividend (inc div tax) (in mn) 33 4999.7 5923 No. of equity shares (in mn) 3. 3. 3. CMP (Rs) (August 2, 24) 34.1 34.1 34.1 Market capitalization (Rs in mn) 12,3 12,3 12,3 Enterprise value (Rs in mn) 137,72 128,146 122,661 Published in August 24. India Infoline Ltd 23-4. India Infoline Ltd. All rights reserved.regd. Off: 24, Nirlon Complex, Off W E Highway, Goregaon(E) Mumbai-4 63. Tel.: +(91 22)5677 59 Fax: 2685 585. This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report. August 25, 24 15