18th December, 2019 Q2FY20 RESULT UPDATE

Retail Equity Research

Bharat Petroleum Corp. Ltd Oil, Gas & Consumable Fuels

BSE CODE: 500547 NSE CODE: BPCL

Bloomberg CODE: BPCL:IN SENSEX: 41,352

12M Investment period Rating as per Large Cap

CMP Rs 496 TARGET Rs 474 RETURN -5% (Closing: 17-12-19)

KEY CHANGES: TARGET RATING EARNINGS

REDUCE

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Operating performance weak

Domestic sales registered meek growth of 1.7% YoY to 10.25MMT, while exports improved 9.8% YoY to 0.56MMT. Average Gross Refining Margin (GRM) for H1FY20 declined 52.5% YoY to USD 3.10/bbl (vs USD 6.52/bbl in H1FY19). Weighted Average GRM stood at USD 3.38/bbl for Q2FY20 (vs. USD 5.57/bbl in Q2FY19) owing to inventory losses of Rs. 26cr. BPCL reported lower market share of 28.9% among PSUs in High-speed Diesel segment while there was marginal improvement of 4bps in marketing segment market share which stood at 28.6%. Net profit grew 40.2% YoY due to favorable judgements received from Income Tax authorities on various tax issues.

No improvements in GRM

The core refining margin for Kochi stood at 3.5%, while it stood at 4.1% for Mumbai in Q2FY20. Kochi refinery will commence a project to make it a zero-naphtha refinery by June 2020, which is expected to improve its refining margins. In addition, the management expects improvements in Kochi’s GRM to happen once petrochemical expansion plans start. The Kochi refinery was under BS-VI maintenance shutdown in September 2019, while Mumbai refinery shutdown will be from November 15th to December 2019. The product slate for Q2FY20 was - Diesel: 48% and Fuel & Oil: 4.5%.

Key concall highlights

The company has not moved to the lower tax rate for now as the company has unutilized MAT credit of Rs. 460cr.

The management has invested Rs. 550cr and Rs. 3,300cr in its Mumbai and Kochi refineries respectively for BS-VI production and naptha conversion.

The management has revised its capex guidance to Rs. 7,950cr for FY20 and Rs. 12,488cr for FY21.

Valuation

We believe current valuations have factored in the privatization scenario of BPCL. However, we remain cautious on the near-term outlook of BPCL owing to the uncertain demand for diesel which is in turn due to the ongoing slowdown in the Indian economy. We expect improvements in refining margins and higher utilizations to start kicking in from H1FY21 and we downgrade our rating on the stock to REDUCE with a revised target price of Rs. 474 using sum of the parts (SOTP) valuation.

Company Data Market Cap (cr) Rs. 97,558 Enterprise Value (cr) Rs. 122,986 Outstanding Shares (cr) 196.7 Free Float 46.0% Dividend Yield 3.8% 52 week high Rs. 550 52 week low Rs. 309 6m average volume(lacs) 86,977 Beta 1.3 Face value Rs. 10

Shareholding % Q4FY19 Q1FY20 Q2FY20

Promoters 53.3 53.3 53.3

FII’s 15.6 15.3 14.6

MFs/Insti 16.2 16.5 18.8

Public 2.8 2.7 2.6

Others 12.1 12.3 10.7

Total 100.0 100.0 100.0

Promoter’s pledge 0.0 0.0 0.0

Price Performance 3 Month 6 Month 1 Year

Absolute Return 34.5% 37.9% 53.1% Absolute Sensex 13.4% 6.1% 14.0% Relative Return* 21.2% 31.8% 39.1%

*over or under performance to benchmark index

Standalone (cr) FY19A FY20E FY21E

Sales 337,623 293,732 301,956

Growth (%) 21.8 -13.0 2.8

EBITDA 11,964 11,479 13,435

EBITDA Margin (%) 3.5 3.9 4.4

Adj. PAT 7,132 7,350 8,667

Growth (%) -9.9 3.1 17.9

Adj. EPS 36.3 37.4 44.1

Growth (%) -9.9 3.1 17.9

P/E 11.0 13.3 11.3

P/B 2.1 2.4 2.1

EV/EBITDA 8.8 10.7 9.0

ROE (%) 19.4 17.9 18.5

D/E 0.7 0.6 0.5

290

390

490

590

Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

BPCL Sensex Rebased

Another weak quarter for BPCL Bharat Petroleum Corporation Ltd (BPCL) is one of India’s leading oil & gas companies. It operates refineries located in Kochi, Mumbai, Bina and Numaligarh. The company’s marketing infrastructure consists of installations, retail outlets, depots and LPG distributors.

The company’s topline declined 9.5% YoY to Rs. 75,057cr in Q2FY20. The domestic sales volume rose marginally 1.7% YoY to 10.25MT (v/s 10.08MT in Q2FY19) led by growth in Petrol (+7.0%) and LPG (+6.0%).

EBITDA was down 3.4% YoY to Rs. 2,375cr on weak performance in the refining segment and account of inventory losses to the tune of Rs. 26cr.

We increase our PAT estimates by 15.8%/11.7% for FY20E/FY21E on account of tax credits which offset its weak H1FY20 performance and lack of improvements in gross refining margin.

Due to subdued diesel demand outlook and no potential earnings improvements, we value BPCL with a revised target price of Rs. 474 and downgrade our rating to REDUCE.

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Quarterly Financials (Standalone)

Profit & Loss Account

Q2FY20 Q2FY19 YoY Growth

% Q1FY20

QoQ Growth %

H1FY20 H1FY19 YoY Growth

%

Revenue 75,057 82,924 (9.5) 85,860 (12.6) 160,916 165,393 (2.7)

EBITDA 2,375 2,459 (3.4) 2,180 8.9 4,555 6,372 (28.5)

EBITDA margins 3.2 3.0 19bps 2.5 62bps 2.8 3.9 (110bps)

Depreciation 952 757 25.8 914 4.2 1,866 1,496 24.7

EBIT 1,423 1,702 (16.4) 1,266 12.4 2,688 4,876 (44.9)

Interest 639 328 95.0 452 41.2 1,091 629 73.4

Other Income 871 499 74.7 538 61.8 1,410 1,009 39.7

Exceptional Items - - - - - - - -

PBT 1,655 1,873 (11.6) 1,352 22.4 3,007 5,255 (42.8)

Tax (53) 654 (108.2) 277 (119.3) 223 1,743 (87.2)

Share of profit from Associate - - - - - - - -

Minority Interest - - - - - - - -

Reported PAT 1,708 1,219 40.2 1,075 58.9 2,784 3,512 (20.7)

Adjustments - - - - - - - -

Adjusted PAT 1,708 1,219 40.2 1,075 58.9 2,784 3,512 (20.7)

No. of shares 196.7 196.7 - 196.7 - 196.7 196.7 -

EPS (Rs) 8.7 6.2 40.2 5.5 58.9 14.2 17.9 (20.7)

Sum of the parts (SOTP) valuation

Particulars Methodology Multiple % Holding Value (Rs. cr.) Value Per Share

(Rs.)

BPCL (Standalone) FY21E P/E 8.0 100.0% 69,432 353

Investments 151

- NRL FY21E P/E 8.0 60.0% 9,505 48

- BPRL P/BV 1.0 100.0% 3,043 15

- BORL P/BV 1.0 50.0% 3,666 19

- Petronet Geojit TP - 12.5% 6,604 34

- Indraprastha Gas Market Price - 22.5% 6,813 35

20% holding discount to investments (30)

474

Change in Estimates

Old estimates New estimates Change %

Year / Rs. cr FY20E FY21E FY20E FY21E FY20E FY21E

Revenue 335,934 342,653 293,732 301,956 (12.6) (11.9)

EBITDA 10,707 12,868 11,479 13,435 7.2 4.4

Margins (%) 3.2 3.8 3.9 4.4 70bps 60bps

Adj. PAT 6,348 7,758 7,350 8,667 15.8 11.7

EPS 32.3 39.4 37.4 44.1 15.8 11.9

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PROFIT & LOSS

Y.E March (Rs cr) FY17A FY18A FY19A FY20E FY21E

Revenue 242,048 277,162 337,623 293,732 301,956

% change 28.0 14.5 21.8 (13.0) 2.8

EBITDA 10,829 11,669 11,964 11,479 13,435

% change (2.1) 7.8 2.5 (4.1) 17.0

Depreciation 1,891 2,648 3,189 3,604 4,222

EBIT 8,938 9,020 8,775 7,875 9,213

Interest 496 833 1,319 2,202 2,060

Other Income 2,601 3,011 2,984 2,317 3,165

PBT 11,043 11,198 10,440 7,990 10,318

% change 3.7 1.4 (6.8) (23.5) 29.1

Tax 3,003 3,279 3,308 639 1,651

Tax Rate (%) 27.2 29.3 31.7 8.0 16.0

Reported PAT 8,039 7,919 7,132 7,350 8,667

Adj* - - - - -

Adj PAT 8,039 7,919 7,132 7,350 8,667

% change 8.2 (1.5) (9.9) 3.1 17.9

No. of shares (cr) 196.7 196.7 196.7 196.7 196.7

Adj EPS (Rs) 40.9 40.3 36.3 37.4 44.1

% change 19.3 (1.5) (9.9) 3.1 17.9

DPS (Rs) 21.7 14.0 19.0 16.0 18.0

CEPS (Rs) 50.5 53.7 52.5 55.7 65.5

CASH FLOW

Y.E March (Rs cr) FY17A FY18A FY19A FY20E FY21E

Net inc. + Depn. 9,931 10,568 10,321 10,955 12,889

Non-cash adj. 5,810 1,811 6,024 9,015 5,027

Changes in W.C (7,859) (3,405) (8,701) (323) (1,470)

C.F. Operation 7,882 8,975 7,645 19,647 16,446

Capital exp. (8,967) (6,915) (9,017) (10,868) (11,172)

Change in inv. 611 (351) 518 643 813

Other invest.CF (1,759) 2,517 962 (3,653) (206)

C.F – Investment (10,115) (4,750) (7,537) (13,878) (10,565)

Issue of equity - - - - -

Issue/repay debt 7,518 (67) 5,176 363 (1,540)

Dividends paid (5,114) (2,885) (3,540) (3,737) (3,147)

Other finance.CF (1,837) (1,252) (1,723) (2,149) (917)

C.F – Finance 567 (4,204) (87) (5,523) (5,604)

Chg. in cash (1,666) 21 21 246 277

Closing cash 54 76 78 324 601

BALANCE SHEET

Y.E March (Rs cr) FY17A FY18A FY19A FY20E FY21E

Cash 54 76 78 324 601

Accounts Receivable 4,758 5,153 6,671 5,728 6,341

Inventories 19,798 20,874 21,545 22,811 23,667

Other Cur. Assets 9,648 10,796 18,343 12,836 13,053

Investments 9,242 10,826 10,916 10,023 8,960

Gross Fixed Assets 34,944 48,852 55,465 66,333 77,506

Net Fixed Assets 31,279 42,776 46,259 53,523 60,473

CWIP 11,217 4,044 6,703 8,626 9,557

Intangible Assets 564 566 592 581 602

Def. Tax (Net) 127 405 449 653 680

Other Assets 5,304 4,708 4,071 6,138 5,905

Total Assets 91,990 100,223 115,627 121,242 129,840

Current Liabilities 36,317 36,699 43,661 46,467 49,651

Provisions 1,353 1,366 1,510 1,502 1,652

Debt Funds 21,067 22,910 27,266 27,752 24,212

Other Liabilities 3,583 5,096 6,453 6,514 7,506

Equity Capital 1,311 1,967 1,967 1,967 1,967

Reserves & Surplus 28,357 32,185 34,771 39,041 44,852

Shareholder’s Fund 29,668 34,152 36,738 41,008 46,818

Minority Interest - - - - -

Total Liabilities 91,990 100,223 115,627 121,242 129,840

BVPS (Rs) 151 174 187 209 238

RATIOS

Y.E March FY17A FY18A FY19A FY20E FY21E

Profitab. & Return

EBITDA margin (%) 4.5 4.2 3.5 3.9 4.4

EBIT margin (%) 3.7 3.3 2.6 2.7 3.1

Net profit mgn.(%) 3.3 2.9 2.1 2.5 2.9

ROE (%) 27.1 23.2 19.4 17.9 18.5

ROCE (%) 17.6 15.8 13.7 11.8 13.0

W.C & Liquidity

Receivables (days) 7.2 6.8 7.2 7.1 7.7

Inventory (days) 33.4 30.7 25.8 31.4 31.7

Payables (days) 19.2 19.2 20.6 21.4 22.1

Current ratio (x) 0.8 0.8 1.0 0.9 0.9

Quick ratio (x) 0.2 0.2 0.3 0.2 0.2

Turnover & Leverage

Gross asset T.O (x) 6.0 6.6 6.5 4.8 4.2

Total asset T.O (x) 2.9 2.9 3.1 2.5 2.4

Int. covge. ratio (x) 18.0 10.8 6.7 3.6 4.5

Adj. debt/equity (x) 0.7 0.7 0.7 0.6 0.5

Valuation

EV/Sales (x) 0.4 0.4 0.3 0.4 0.4

EV/EBITDA (x) 9.8 9.2 8.8 10.7 9.0

P/E (x) 10.6 10.6 11.0 13.3 11.3

P/BV (x) 2.9 2.5 2.1 2.4 2.1

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Recommendation Summary

Investment Rating Criteria

220

270

320

370

420

470

520

570

Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19

Dates Rating Target

4-Oct-17 HOLD 500

4-Sep-19 HOLD 375

18-Dec-19 REDUCE 474

Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable

Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable

To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell.

The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return

basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of

valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded

to BUY or downgraded to a HOLD, REDUCE or SELL.

Neutral- The analyst has no investment opinion on the stock under review

General Disclosures and Disclaimers

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