bharat petroleum corporation05sep19city gas distribution (cgd) stake in 17 geographical areas....

September 5, 2019 1

Rating: BUY | CMP: Rs381 | TP: Rs466

Divestment blues!

We believe divestment of BPCL to private sector will help maximize revenue

for the government (Rs847bn). Divestment to IOCL will create a behemoth

although it is unlikely to alter market dynamics in the near term. While

divestment to IOCL is the easy way out, real price discovery of BPCL will

happen with stake sale to foreign/private players. Sale to IOCL will attract

reasonable premium as HPCL transaction was done at ~18% premium.

However, stake sale to any private/foreign major can value BPCL at

Rs800/share and unlock value. BPCL stake sale will also remove the

divestment overhang plaguing the PSU’s. We tweak our estimates post

Annual report updation and other changes. We remain constructive on OMCs

as they are well placed to benefit from benign crude oil prices and GRM

improvement from IMO 2020 implementation. Reiterate BUY.

Event: Media reports of sale of BPCL

Media reports suggests that the government is looking to divest its 53.29% stake in

BPCL to IOCL or even private players. BPCL is the second largest Oil Marketing

Company (OMC) after IOCL and is one of the best managed PSU with presence

across refining (33.2 MTPA or 13% of Indian refining), fuel retailing (14,977 stations

or 23% of total outlets), E&P stakes in Mozambique, Brazil, Russia etc along with

City Gas Distribution (CGD) stake in 17 Geographical Areas. Besides, BPCL is one

of the promoters of IGL, Petronet etc. In this note, we look at various scenarios in

terms of ownership change and its impact on competition landscape of India.

Scenario 1- BPCL + IOCL-an energy behemoth: Merger of BPCL with IOCL will

create an energy behemoth with disproportionate share in the Indian energy market

across refining, fuel retailing and City Gas Distribution (CGD) players. This will be

an easiest way out for the government to raise money to meet part of their

divestment target of ~Rs1trn. However, such high share might invite attention of the

Competition Commission as this run contrary to government intention to bring in

more competition in fuel retailing and reduce fuel prices.

Synergy in refining and product sourcing: In terms of synergy, there is lot of

overlap in fuel retailing business and major savings can be achieved by way of

coordinated marketing plans. However, in refining, while IOCL is predominantly

strong in North and East India and has stake in Chennai Petroleum (11.5MTPA),

BPCL is a sizeable player in high growth West and South India. BPCL also has

50% stake in Central India based Bina refinery (7.8MTPA) and 62% stake in North

East based Numaligarh refinery (3MTPA). Crude sourcing is another area where

there is immense scope for cooperation.

Funding the acquisition not a concern: Funding the BPCL stake by IOC will not

be a major concern, as IOC’s net debt to equity stands comfortable at 0.55x.

Besides, IOCL also holds value accretive stakes in ONGC, GAIL and OIL India

(current value Rs137bn). In addition, BPCL has a much better earnings profile with

ROEs of >20% vis-à-vis 15% for IOCL.

Bharat Petroleum Corporation (BPCL IN)

September 5, 2019

Event Update

☑ Change in Estimates | ☑ Target | Reco

Change in Estimates

Current Previous

FY20E FY21E FY20E FY21E

Rating BUY BUY

Target Price 466 499

Sales (Rs. m) 3,457,032 3,634,502 3,476,028 3,654,385

% Chng. (0.5) (0.5)

EBITDA (Rs. m) 160,996 161,250 163,213 161,070

% Chng. (1.4) 0.1

EPS (Rs.) 43.8 43.8 48.6 47.2

% Chng. (9.9) (7.2)

Key Financials - Standalone

Y/e Mar FY18 FY19 FY20E FY21E

Sales (Rs. bn) 2,358 2,982 3,457 3,635

EBITDA (Rs. bn) 152 151 161 161

Margin (%) 6.4 5.1 4.7 4.4

PAT (Rs. bn) 98 85 86 86

EPS (Rs.) 45.1 43.4 43.8 43.8

Gr. (%) (37.7) (3.9) 1.0 0.0

DPS (Rs.) 21.0 21.0 15.6 19.0

Yield (%) 5.5 5.5 4.1 5.0

RoE (%) 29.0 22.6 19.6 16.6

RoCE (%) 18.1 15.1 14.7 14.4

EV/Sales (x) 0.5 0.4 0.3 0.2

EV/EBITDA (x) 7.4 7.4 5.7 5.3

PE (x) 8.4 8.8 8.7 8.7

P/BV (x) 2.3 1.9 1.5 1.4

Key Data BPCL.BO | BPCL IN

52-W High / Low Rs.422 / Rs.239

Sensex / Nifty 36,644 / 10,848

Market Cap Rs.826bn/ $ 11,498m

Shares Outstanding 2,169m

3M Avg. Daily Value Rs.3269.13m

Shareholding Pattern (%)

Promoter’s 53.29

Foreign 15.30

Domestic Institution 15.58

Public & Others 15.82

Promoter Pledge (Rs bn) -

Stock Performance (%)

1M 6M 12M

Absolute 12.3 5.0 9.1

Relative 12.5 4.5 13.2

Avishek Datta

[email protected] | 91-22-66322254

Bharat Petroleum Corporation

September 5, 2019 2

Scenario 2: Stake sale to private/foreign players- real value unlocking: BPCL

stake sale to private/foreign players will help unlock the real value of the company

and help realize government strategy to bring competition in fuel retailing and break

the hegemony of the OMCs, which has over 90% market share. Post sale, share of

private/foreign players in fuel retailing will increase to ~33% from current 10%.

BPCL’s well-laid pipeline infrastructure and oil terminals across India can be used

by the entrant to significantly scale up operations in a competitive landscape. India

is one of the largest growth markets and players will be ready to pay significant

premium to get a share in this pie. We have valued BPCL’s stake at Rs800/share.

IOCL + BPCL have a major share in Indian oil market

BPCL IOCL Total

Refining (MTPA) 33.2 80.7 114

% of total 13% 32% 45%

Marketing (nos) 14,977 27,878 42855

% of total 23.0% 42.8% 66%

Pipeline (kms) 2,241 14,000 16,241

Aviation fuel station (nos) 56 117 173

% of total 23% 47% 70%

Petroleum terminals/depots 78.00 125.00 203

% of total 25% 40% 65%

CGD-No of Geographical areas 17 40

FY19 Consol EBIDTA (Rs m) 151,122 352,227 503,349

FY19 Consol PAT (Rs m) 85,278 172,739 258,017

Q1 Borrowings (Rs m) 306,470 722,270 1,028,740

Net worth FY19 end (Rs m) 408,348 1,143,466 1,551,814

Cash + liquid inv 64,616 94,816 159,432

Net debt/equity 0.59 0.55 0.56

Source: Company, PL

BPCL blue sky scenario

FY20 Consol EBIDTA 160,996 EV/E

Refining 106,829 7.0 747,802

Marketing 54,167 12.0 650,007

E&P

Mozambique 180,000

Russia 72,000

Total 1,649,809

Less Debt 325,219

Equity value 1,324,590

Add investments

PLNG 50,000

IGL 51,750

Oil India 4,013

Cash 159,616

Value 1,589,969

Value per share 808

Source: Company, PL


September 5, 2019 3

IOCL + BPCL will have a formidable product reach

Source: Company, PL

IOCL + BPCL to corner disproportionate market share in retailing

42.8%50.3% 47.2%

39.9%

23.0%25.0%

22.6%24.9%

34.2%24.7% 30.2% 35.1%

0%

20%

40%

60%

80%

100%

Retail outlet LPG distributorship ATF stations Petroleumterminal/depots

IOCL BPCL Others

Source: Company, PL

Bharat Oman

Refineries Ltd.


September 5, 2019 4

BPCL subsidiary holdings

Source: Company, PL


September 5, 2019 5

BPCL’s E&P footprint

Source: Company, PL


September 5, 2019 6

BPCL’s E&P footprint

Source: Company, PL

IOCL’s upstream portfolio

Source: Company, PL


September 5, 2019 7

Financials

Income Statement (Rs m)


Net Revenues 2,357,698 2,982,256 3,457,032 3,634,502

YoY gr. (%) 17.2 26.5 15.9 5.1

Cost of Goods Sold 2,019,084 2,627,487 3,059,683 3,239,947

Gross Profit 338,615 354,769 397,349 394,554

Margin (%) 14.4 11.9 11.5 10.9

Employee Cost - - - -

Other Expenses - - - -

EBITDA 151,727 151,122 160,996 161,250

YoY gr. (%) 12.3 (0.4) 6.5 0.2

Margin (%) 6.4 5.1 4.7 4.4

Depreciation and Amortization 28,850 34,178 41,216 42,126

EBIT 122,877 116,945 119,780 119,124

Margin (%) 5.2 3.9 3.5 3.3

Net Interest 11,857 17,640 20,350 18,227

Other Income 17,827 20,375 29,073 29,593

Profit Before Tax 128,846 119,680 128,504 130,491

Margin (%) 5.5 4.0 3.7 3.6

Total Tax 43,816 43,775 37,029 38,094

Effective tax rate (%) 34.0 36.6 28.8 29.2

Profit after tax 85,030 75,905 91,475 92,397

Minority interest (12,889) (9,373) 5,381 6,297

Share Profit from Associate - - - -

Adjusted PAT 97,919 85,278 86,094 86,100

YoY gr. (%) 3.0 (12.9) 1.0 0.0

Margin (%) 4.2 2.9 2.5 2.4

Extra Ord. Income / (Exp) - - - -

Reported PAT 97,919 85,278 86,094 86,100

YoY gr. (%) 3.0 (12.9) 1.0 0.0

Margin (%) 4.2 2.9 2.5 2.4

Other Comprehensive Income - - - -

Total Comprehensive Income 97,919 85,278 86,094 86,100

Equity Shares O/s (m) 2,169 1,967 1,967 1,967

EPS (Rs) 45.1 43.4 43.8 43.8

Source: Company Data, PL Research

Balance Sheet Abstract (Rs m)


Non-Current Assets

Gross Block 519,125 589,214 795,401 854,901

Tangibles 519,125 589,214 795,401 854,901

Intangibles - - - -

Acc: Dep / Amortization 66,519 99,504 166,194 214,659

Tangibles 66,519 99,504 166,194 214,659

Intangibles - - - -

Net fixed assets 452,607 489,710 629,207 640,242

Tangibles 452,607 489,710 629,207 640,242

Intangibles - - - -

Capital Work In Progress 98,754 136,545 23,617 24,566

Goodwill 2,786 3,438 2,289 2,289

Non-Current Investments 224,049 230,469 155,549 170,461

Net Deferred tax assets (51,158) (63,383) (84,888) (106,629)

Other Non-Current Assets 15,952 16,789 856 942

Current Assets

Investments 54,493 57,991 63,790 70,169

Inventories 225,295 229,349 277,499 304,565

Trade receivables 52,048 69,063 93,459 102,463

Cash & Bank Balance 13,539 6,625 95,826 117,119

Other Current Assets 12,488 13,642 14,637 16,101

Total Assets 1,204,206 1,369,304 1,479,459 1,583,918

Equity

Equity Share Capital 21,693 19,669 19,669 19,669

Other Equity 344,493 367,978 470,234 526,164

Total Networth 366,186 387,647 489,903 545,833

Non-Current Liabilities

Long Term borrowings 289,043 343,156 247,260 214,870

Provisions 15,662 15,376 16,824 18,506

Other non current liabilities 1,431 2,840 3,124 3,437

Current Liabilities

ST Debt / Current of LT Debt 80,930 85,990 77,959 82,174

Trade payables 132,319 173,847 210,816 231,428

Other current liabilities 243,769 271,260 320,206 352,226

Total Equity & Liabilities 1,204,206 1,369,304 1,479,459 1,583,918



September 5, 2019 8

Cash Flow (Rs m)

Y/e Mar FY18 FY19 FY20E FY21E Year

PBT 128,846 119,680 128,504 130,491

Add. Depreciation 28,850 34,178 41,216 42,126

Add. Interest 11,857 17,640 20,350 18,227

Less Financial Other Income 17,827 20,375 29,073 29,593

Add. Other - - - -

Op. profit before WC changes 169,554 171,498 190,069 190,844

Net Changes-WC (27,112) (42,686) 24,425 32,727

Direct tax (35,649) (28,126) (15,887) (24,744)

Net cash from Op. activities 106,792 100,686 198,608 198,827

Capital expenditures (167,605) (215,789) (102,829) (60,633)

Interest / Dividend Income - - - -

Others 48,175 - (1) -

Net Cash from Invt. activities (119,430) (215,789) (102,830) (60,633)

Issue of share cap. / premium 38,229 7,850 5,578 (34,485)

Debt changes 23,717 97,932 (36,508) (45,419)

Dividend paid (52,880) (48,383) (35,976) (43,794)

Interest paid (11,857) (17,640) (20,350) (18,227)

Others - - - -

Net cash from Fin. activities (2,793) 39,760 (87,256) (141,925)

Net change in cash (15,430) (75,343) 8,522 (3,730)

Free Cash Flow (60,812) (115,103) 95,779 138,194


Quarterly Financials (Rs m)

Y/e Mar Q2FY19 Q3FY19 Q4FY19 Q1FY20

Net Revenue 7,22,918 7,91,688 7,39,904 7,63,180

YoY gr. (%) 35.6 30.6 13.4 6.4

Raw Material Expenses 6,40,933 7,42,737 6,40,003 6,92,816

Gross Profit 81,985 48,952 99,901 70,364

Margin (%) 11.3 6.2 13.5 9.2

EBITDA 24,194 7,374 48,050 21,799

YoY gr. (%) (31.4) (76.9) 29.1 (43.7)

Margin (%) 3.3 0.9 6.5 2.9

Depreciation / Depletion 7,571 7,781 9,149 9,141

EBIT 16,623 (408) 38,901 12,658

Margin (%) 2.3 (0.1) 5.3 1.7

Net Interest 3,276 3,369 3,526 4,524

Other Income 5,380 9,672 10,576 5,385

Profit before Tax 18,727 5,895 45,951 13,518

Margin (%) 2.6 0.7 6.2 1.8

Total Tax 6,540 944 14,702 2,767

Effective tax rate (%) 34.9 16.0 32.0 20.5

Profit after Tax 12,187 4,951 31,249 10,751

Minority interest - - - -

Share Profit from Associates - - - -

Adjusted PAT 12,187 4,951 31,249 10,751

YoY gr. (%) (48.3) (76.9) 16.9 (53.1)

Margin (%) 1.7 0.6 4.2 1.4

Extra Ord. Income / (Exp) - - - -

Reported PAT 12,187 4,951 31,249 10,751

YoY gr. (%) (48.3) (76.9) 16.9 (53.1)

Margin (%) 1.7 0.6 4.2 1.4

Other Comprehensive Income - - - -

Total Comprehensive Income 12,187 4,951 31,249 10,751

Avg. Shares O/s (m) - - - -

EPS (Rs) - - - -


Key Financial Metrics


Per Share(Rs)

EPS 45.1 43.4 43.8 43.8

CEPS 58.4 60.7 64.7 65.2

BVPS 168.8 197.1 249.1 277.5

FCF (28.0) (58.5) 48.7 70.3

DPS 21.0 21.0 15.6 19.0

Return Ratio(%)

RoCE 18.1 15.1 14.7 14.4

ROIC 10.8 9.0 9.1 8.5

RoE 29.0 22.6 19.6 16.6

Balance Sheet

Net Debt : Equity (x) 0.8 0.9 0.3 0.2

Net Working Capital (Days) 22 15 17 18

Valuation(x)

PER 8.4 8.8 8.7 8.7

P/B 2.3 1.9 1.5 1.4

P/CEPS 6.5 6.3 5.9 5.8

EV/EBITDA 7.4 7.4 5.7 5.3

EV/Sales 0.5 0.4 0.3 0.2

Dividend Yield (%) 5.5 5.5 4.1 5.0


Key Operating Metrics


Crude /bbl 58 70 75 80

US$/Rs 65 71 73 75

GRM (US$/bbl) 7 5 7 8

Refining volume (MTPA) 29 30 31 31



September 5, 2019 9

Price Chart Recommendation History

No. Date Rating TP (Rs.) Share Price (Rs.)

1 4-Jul-19 BUY 499 380

2 20-May-19 BUY 499 392

3 5-Apr-19 BUY 499 358

4 27-Mar-19 BUY 499 384

5 11-Feb-19 Accumulate 326 337

6 7-Jan-19 Accumulate 326 356

7 30-Oct-18 Accumulate 326 277

8 5-Oct-18 Accumulate 326 331

Analyst Coverage Universe

Sr. No. Company Name Rating TP (Rs) Share Price (Rs)

1 Aarti Industries BUY 1,980 1,475

2 Bharat Petroleum Corporation BUY 499 380

3 GAIL (India) BUY 207 124

4 Hindustan Petroleum Corporation BUY 354 244

5 I.G. Petrochemicals BUY 477 257

6 Indian Oil Corporation BUY 168 137

7 Indraprastha Gas BUY 378 312

8 Mahanagar Gas BUY 1,179 783

9 NOCIL BUY 199 89

10 Oil & Natural Gas Corporation BUY 223 167

11 Oil India Accumulate 236 178

12 Petronet LNG BUY 306 236

13 Reliance Industries Accumulate 1,363 1,249

PL’s Recommendation Nomenclature (Absolute Performance)

Buy : > 15%

Accumulate : 5% to 15%

Hold : +5% to -5%

Reduce : -5% to -15%

Sell : < -15%

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

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September 5, 2019 10

ANALYST CERTIFICATION

(Indian Clients)

We/I, Mr. Avishek Datta- MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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bharat petroleum corporation05sep19city gas distribution (cgd) stake in 17 geographical areas....

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