Buy BPCL; target of Rs 400: Motilal Oswal

Motilal Oswal is bullish on Bharat Petroleum Corporation (BPCL) and has recommended buy rating on the stock with a target of Rs 400 in its November 15, 2012 research report.

“Bharat Petroleum Corp Ltd (BPCL) reported 2QFY13 EBITDA of INR42b (est of INR17.9b), led by net overrecoveries of INR18.3b (v/s est of nil) and inventory gain of INR4.4b.  PAT stood at INR50b (est INR10b) v/s PAT loss of INR32b in 2QFY12 and INR88b in 1QFY13. Variation at the PAT level was higher due to (a) forex gain of INR11b, (b) lower interest cost and depreciation by INR1b each and (c) nil tax (v/s est of INR2.5b). Given the ad hoc subsidy sharing, quarterly financials are not indicative of the likely full year performance.”

“BPCL's 2QFY13 subsidy of INR72b from the government was for cumulative 1HFY13 (no subsidy in 1QFY13). However, this compensation was inadequate and resulted in INR38b loss for the company in 1HFY13. As in previous years, we assume major portion of the government subsidy would be given in 2H. For FY13, similar to FY12, we estimate subsidy sharing by the government at 60%, upstream companies 40% and OMCs nil. Reported GRM stood at USD6.4/bbl v/s USD1.7/bbl in 2QFY12 and USD2.6/bbl in 1QFY13. We believe that BPCL's 2QFY13 GRM benefited from crude inventory gains as crude price was higher by USD14/bbl at the quarter-end. Product inventory adventitious gain in 2QFY13 stood at INR4.4b (v/s loss of INR240m in 2QFY12 and a gain of INR1.3b in 1QFY13).”

“We assume brent oil prices of USD110/105/bbl in FY13/FY14 and expect OMCs to be fully compensated by upstream (40% share) and government (60% share) for underrecoveries. We value the company's E&P portfolio at INR118/sh and believe there could be a significant upside potential as we get more clarity on the reserve size at its Mozambique and Brazil discovery. BPCL is drilling at its prospective Brazil blocks and could result in discoveries and further reserve addition. The stock trades at 14.1x FY13E EPS of INR23.9 and 1.4x FY13E BV. BPCL is our top pick among OMCs. Buy,” says Motilal Oswal research report.

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