ICICI Securities Limited BPCL (BHAPET) Subsidy burden drags bottomline in the red. Result Update. Valuation WHAT S CHANGED.

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1 Result Update Rating matrix Rating : Hold Target : 727 Target Period : months Potential Upside : 6% Key Financials ( Crore) FY1 FY11E FY12E FY13E Revenues EBITDA Net Profit Valuation summary FY1 FY11E FY12E FY13E EPS ( ) PE (x) Target PE (x) EV to EBITDA (x) Price to book (x) RoNW (%) RoCE (%) Stock data Market Cap Crore Debt (FY1) Crore Cash + Liq. Invsts (FY1) Crore EV Crore 52 week H/L 84 / 529 Equity capital Crore Face value 1 MF Holding (%) 9.2 FII Holding (%) 7. Price movement 7, 6, 5, 4, 3, 2, Sep-1 Nov-1 Price (R.H.S) Feb-11 May-11 Nifty (L.H.S) Aug WHAT S CHANGED August 18, 211 PRICE TARGET... Changed from 712 to 727 EPS (FY12E)... Changed from 51.7 to 4.6 EPS (FY13E)... Changed from 6.4 to 59.9 RATING...Unchanged Subsidy burden drags bottomline in the red Bharat Petroleum Corp (BPCL) declared its Q1FY12 results with revenues of crore, EBITDA loss of crore and PAT of crore. The results were below our estimates mainly on account of higher net under-recoveries and lower refining margins. The downstream companies shared a net subsidy burden of 32.32% in Q1FY12. The GRM decreased to $3.2 per barrel in Q1FY12 compared to $3.57 per barrel in Q1FY11 mainly on account of lower throughput and plant shutdowns at the Kochi refinery. We have maintained our Brent crude oil prices estimates of US$1 per barrel, going forward. We assume net underrecoveries for downstream companies at 8.8% in FY12E and FY13E. We estimate BPCL will report EPS of 5.8 and 53.5 in FY12E and FY13E, respectively. We recommend a HOLD rating on the stock with a price target of 727. Highlights of the quarter Crude oil throughput declined 7.1% YoY from 5.6 MMT in Q1FY11 to 5.2 MMT in Q1FY12. The gross refining margins (GRMs) decreased from US$3.57 per barrel in Q1FY11 to US$3.2 per barrel in Q1FY12 on account of lower throughput and shutdowns at the Kochi refinery. The total market sales increased 5.5% YoY from 7.4 MMT in Q1FY11 to 7.8 MMT in Q1FY12. The net subsidy burden for downstream companies in this quarter is 32.32% in Q1FY12, which led to net under-recoveries of 3356 crore in Q1FY12. Valuation BPCL (BHAPET) 683 BPCL is trading at 16.8x FY12E and 11.4x FY13E EPS of 4.6 and 59.9, respectively. We recommend the stock with a HOLD rating and price target of 727 (valuation based on average of P/BV multiple: 666 per share and P/E multiple: 788 per share). Analyst s name Mayur Matani mayur.matani@icicisecurities.com Nishit Zota nishit.zota@icicisecurities.com Exhibit 1: Financial Performance ( Crore) Q1FY12A Q1FY12E Q1FY11 Q4FY11 YoY Gr.(%) QoQ Gr.(%) Revenues EBITDA EBITDA Margin (%) bps 17 bps Depreciation Interest Reported PAT EPS ( )

2 Exhibit 2: Total sales and throughput Crude oil throughput declined 7.1% YoY from 5.6 MMT in Q1FY11 to 5.2 MMT in Q1FY12 on account of lower throughput and shutdowns at the Kochi refinery. Going forward, the expansion of its Kochi refinery would increase its throughput volumes in FY12E and FY13E (mmt) (mmt) 5 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Total sales (LHS) Throughput (RHS) Exhibit 3: Refining margins trend The gross refining margins (GRMs) decreased from US$3.6 per barrel in Q1FY11 to US$3. per barrel in Q1FY12 on account of maintenance as well as unplanned shutdown in the Kochi refinery US$ per barrel Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Exhibit 4: EBITDA and EBITDA margins trend 4 9 The EBITDA decreased on account of lower refining margins and higher net under-recoveries for the quarter Crore Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY EBITDA margin (%) EBITDA EBITDA margins Page 2

3 Net subsidy burden of 32.32% in Q1FY12 for downstream companies led to under-recoveries of 3356 crore in Q1FY12 Exhibit 5: Sharing of gross under-recoveries ( Crore) Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Gross under-recoveries Discount from upstream companies Grant from the government Net under-recoveries Exhibit 6: Quarterly profit and loss account ( Crore) ( Crore) Q1FY12 Percent. (%) Q1FY11 Percent. (%) Revenues (Increase) / Decrease in stock in trade Consumption of raw materials Purchase of traded goods Employees Cost Other Expenditure Total Expenditure EBITDA Depreciation EBIT Interest Other Inc /Exp /Extra Ordinary Item PBT Total Tax.... PAT Assumptions We have maintained our Brent crude oil prices estimates at US$1 per barrel, going forward. We have also assumed net under-recoveries for downstream companies at 8.8% in FY12E and FY13E. Valuations BPCL is trading at 16.8x FY12E and 11.4x FY13E EPS of 4.6 and 59.9, respectively. We recommend the stock with a HOLD rating and a price target of 727 (valuation based on average of P/BV multiple: 666 per share and P/E multiple: 788 per share). Exhibit 7: Valuation Table Sales Sales Gr. EPS EPS Gr. PE EV/EBITDA (x) RoNW (%) RoCE (%) Year ( Crore) (%) ( ) (%) (x) FY FY11E FY12E FY13E Page 3

4 Exhibit 8: Valuation Table Valuation based on Price / BV Multiple Adjusted Book Value for FY13E ( Crore) Adjusted number of shares (Crore) 32.8 Adjusted Book Value per share ( ) 437. Add: Listed investments (25% discount to CMP) 82.7 Add: E&P value 86.2 Book Value of core business ( per share) 65.8 Multiple 1.1 Fair Value per share ( ) 666 Valuation based on P / E multiple Profit after tax for FY13E ( Crore) Less: Other Income adjusted for tax ( Crore) 53.4 Adjusted profit after tax for FY13E ( Crore) Number of shares (Crore) 36.2 Adjusted EPS for FY13E ( ) 45.2 Multiple 1.5 Fair value per share without investments ( ) Add: Value of Investments ( per share) Listed investments (25% discount to CMP) 74.9 Bharat Oman Refinery Ltd 59.4 Numaligarh Refinery 12.5 E&P value (BPRL) 86.2 Treasury shares 63.7 Other Investments 16.8 Fair value per share ( ) 788 Weighted Target Price ( per share) 727 Source: ICICIdirect.com Research Page 4

5 ICICIdirect.com Coverage Universe BPCL Sales( Cr.) EPS ( ) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%) Idirect Code BHAPET CMP 683. FY Target 712. FY11E FY12E MCap Upside (%) 4.2 FY13E HPCL Idirect Code HINPET CMP 38. FY Target 472. FY11E FY12E MCap Upside (%) 24.2 FY13E IOCL Idirect Code INDOIL CMP 32. FY Target FY11E FY12E MCap Upside (%) 17.6 FY13E Exhibit 9: Recommendation History Sep-1 Oct-1 Nov-1 Jan-11 Feb-11 Apr-11 May-11 Jul-11 Aug-11 Price Target Price Exhibit 1: Recent Releases Date Event CMP Target Price Rating 22-Mar-11 Initiating Coverage BUY 8-Jun-11 Q4FY11 Result Update HOLD 29-Jun-11 Event Update HOLD 17-Aug-11 Q1FY12 Result Update HOLD Source: ICICIdirect.com Research Page 5

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Strong Buy: >15%/2% for large caps / midcaps, respectively; Buy: Between 1% and 15%/2% for large caps / midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 7 th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai 4 93 research@icicidirect.com ANALYST CERTIFICATION We /I, Mayur Matani MBA Nishit Zota 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 personal views about any and all of 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. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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