BPCL - Dealing with externalities in its own way - Antique

Diesel de-control, a reality while DBT roll out for LPG to yield long term benefits

We understand from BPCL management that Govt. is committed to de-control diesel prices by FY15e with periodic hikes and targets to reduce diesel under-recoveries systematically. Recent rupee depreciation has widened the under-recoveries on diesel; however, periodic price hikes and softening of Brent prices between USD95-105/bbl to offset some of its impact. Current diesel u/r stands at INR8.1/ltr. Also, DBT roll out for LPG to benefit OMCs as savings from diversion of subsidized fuel and non-claiming of subsidy by well to do families is expected to reduce LPG u/r.

Traction in receiving cash from Govt. and lower gross under-recoveries to reduce debt

OMCs have started receiving cash compensation of INR450bn announced for 4QFY13. From Jan-13 onwards OMCs have started receiving INR1000bn of cash from Govt. and with 27% QoQ reduction in 1QFY14e gross u/r to INR263bn (INR362bn in 4QFY13), debt is expected to fall sharply. We estimate BPCL's debt to fall to INR200bn by Jun-13 end from INR310bn at Dec 12, which is almost a 35% reduction in the last six months.

Focus on modernization at refineries, marketing network expansion to drive R&M earnings growth

BPCL focuses to invest INR220bn over next few years in domestic R&M business by expanding its Kochi refinery capacity to 15.5mmtpa from 9.5mmtpa along with improving nelson complexity to ~9 from ~6. Also, CDU replacement & CCR projects at Mumbai refinery, pipeline expansions and setting up of 700-800 retail outlets every year would drive domestic earnings growth.

Brazil to emerge as a strong E&P play

With Mozambique getting largely established as a giant gas province, BPCL management believes that next phase of upstream prospects lie in Brazil. With two appraisal wells planned in Campos' basin (Wahoo) in FY14, we expect positive resource upside in Brazil. Also, consortium is readying appraisal program for Sergipe & Alagoas basin to commence in 2HFY14. Further in Mozambique, consortium partners have planned 7 appraisal and 4 exploration wells this year.

Reiterate BUY on BPCL with a target price of INR535/sh

Though in near term sharp rupee depreciation would impact BPCL due to its FX exposure on crude payables and dollar debt coupled with higher under-recoveries. However steady diesel price hikes as seen since Jan-13 and implementation of DBT for LPG may keep u/r under check. Reiterate BUY.

Source : Equity Bulls

Keywords