Please see the end of the report for disclaimer and disclosures. -1-

Bharat Petroleum Corporation Limited RESEARCH

EQUITY RESEARCH July 0 4, 2008

Under-recoveries remain a cause for concern

For FY08, Bharat Petroleum Corporation Limited (BPCL) reported a

13% yoy growth in net sales led by higher sales volume of 28.01 MMT. The

improvement in net sales can also be attributed to the issue of oil bonds

worth Rs. 85.9 bn by the Government of India (GoI). In addition, the gross

refining margins (GRM) improved significantly to USD 4.6/bbl (up

26.4% yoy) for the Mumbai refinery and USD 7.18/bbl (up 107.5% yoy) for

the Kochi refinery.

However, the sky-rocketing crude prices in the global market along with the

price controls administered by the government in the domestic market kept

the operations difficult for the oil marketing companies (OMCs).

Consequently, the share of OMCs in the under-recoveries remained high

during the year. After the previous price hike in Feb’08, the GoI undertook

another price hike in June’08 to provide some respite to the OMCs. The

prices of petrol, diesel, and domestic LPG were revised upward by

Rs. 5/litre, Rs. 3/litre, and Rs. 50/cylinder, respectively. However, the oil

companies were expecting a hike of Rs. 21.4/litre for petrol, Rs. 31.6/litre for

diesel, and Rs. 353 per cylinder for LPG to absorb under-recoveries entirely.

Consequently, the GoI and OMCs would still continue to absorb a major

portion of the under-recoveries. As a result, we anticipate that the rising

crude prices without a corresponding increase in the retail selling prices

would adversely impact the profitability of the OMCs.

At the current price of Rs. 228.3, the stock trades at a forward P/E of 7.2x

and 6x for FY09E and FY10E, respectively. Based on our valuation and

results analysis, we believe that the stock is fairly priced at the current

levels, and reiterate our Hold rating on the stock.

Bharat Petroleum Corporation Limited HoldRESULTS REVIEW

Share Data

Market Cap Rs. 82.54 bn

Price Rs. 228.30

BSE Sensex 13,454.00

Reuters BPCL.BO

Bloomberg BPCL IN

Avg. Volume (52 Week) 0.14 mn

52-Week High/Low Rs. 560/206

Shares Outstanding 361.54 mn

Valuation Ratios (Consolidated)

Year to 31 March 2009E 2010E

EPS (Rs.) 31.8 37.8

+/- (%) (24.9%) 18.7%

PER (x) 7.2x 6.0x

EV/ Sales (x) 0.1x 0.1x

EV/ EBITDA (x) 5.8x 5.1x

Shareholding Pattern (%)

Promoters 64

FIIs 11

Institutions 19

Public & Others 6

Relative Performance

100200300400500600700

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

BPCL Rebased BSE IndexKey Figures (Consolidated)Quarterly Data Q4'07 Q3'08 Q4'08 YoY% QoQ% FY07 FY08 YoY%(Figures in Rs. mn, except per share data)

Net Sales 244,369 289,678 327,632 34.1% 13.1% 984,192 1,112,431 13.0%

EBITDA 13,934 6,786 8,274 (40.6%) 21.9% 45,196 37,037 (18.1%)

Adj. Net Profit 7,264 (468) (41) (100.6%) (91.2%) 22,724 15,332 (32.5%)

Margins(%)

EBITDA 5.7% 2.3% 2.5% 4.6% 3.3%

NPM 3.0% (0.2%) (0.0%) 2.3% 1.4%

Per Share Data (Rs.)

Normalised EPS 20.1 (14.4) 0.00 (100.0%) (100.0%) 62.8 42.4 (32.5%)

Please see the end of the report for disclaimer and disclosures. -2-

Bharat Petroleum Corporation Limited RESEARCH

EQUITY RESEARCH July 0 4, 2008

Result Highlights

For the year ended Mar’08, consolidated net sales increased 13% yoy to

Rs. 1,112.4 bn, driven by higher sales volumes of 28.01 MMT (domestic and

exports). Increase in sales volume of 10.4% yoy was also supported by a

rise in crude thruput (up 5.6% yoy to 23.52 MMT). Further, oil bonds worth

Rs. 85.9 bn issued by the GoI contributed to the increase in the top line.

Despite a healthy growth of 13% yoy in net sales, EBITDA for FY08 declined

18.1% yoy to Rs. 37 bn, and EBITDA margin went down by 130 bps yoy

from 4.6% in FY07 to 3.3% in FY08. The decrease in EBITDA margin was

primarily due to a higher raw material cost and increase in the prices of

products and crude purchased from the international markets. However, the

Company’s GRMs witnessed an increase, which was in-line with the global

trends. While the GRM for the Mumbai refinery increased from USD 3.64 per

barrel in FY07 to USD 4.60 per barrel (up 26.4% yoy) in FY08, the GRM for

the Kochi refinery jumped from USD 3.46 per barrel in FY07 to USD 7.18 per

barrel (up 107.5% yoy) in FY08.

Adjusted net profit also declined 32.5% yoy to Rs. 15.3 bn, and net profit

margin went down 93 bps to 1.4%. The fall in the net profit margin was also

due to exceptionally higher effective tax rate of 42.4% yoy for the year.

Top-line supported by oil bonds issued by GoI worth Rs. 85.9 bn

Gross Refining Margin ($/barrel)

3.64 3.464.60

7.18

0

1

2

3

4

5

6

7

8

FY07 FY08

Mumbai Refinery Kochi Refinery

Physical Performance

0

1

2

3

4

5

6

7

8

Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08

MM

T

Sales Volume (including exports) Crude Throughput

Please see the end of the report for disclaimer and disclosures. -3-

Bharat Petroleum Corporation Limited RESEARCH

EQUITY RESEARCH July 0 4, 2008

Key Events

• Sabarmati Gas, a retail JV between Gujrat State Petroleum Corporation

(GSPC) and BPCL, is planning to raise Rs. 1.4 bn by offering equity

stake to strategic partners for a premium. The company has also

chacked out a business development plan with a projected cost of

Rs. 4.1 bn. Around 2.7 bn is expected to be raised through the term

loan, and the balance is likely to be raised through IPO route after 3-4

years.

• BPCL is planning to set up a JV company in consortium with Shapoorji

Pallonji and Nandan Biomatrix for the establishment of bio-diesel value

chain in Uttar Pradesh by subscribing to 33.33% of equity capital for an

amount of Rs. 2.7 bn.

• Sabarmati Gas, a retail JV between Gujrat State Petroleum Corporation

and BPCL, is planning to raise Rs. 1.4 bn by offering 50% equity stake

to strategic partners. The amount will be utilised to fund a business

development plan with a projected cost of Rs. 4.1 bn.

Key Risks

The following factors may pose threats to our rating:

• Change in the government’s policy on the subsidy-sharing mechanism

• Unexpected increase in the global crude oil prices

Outlook

BPCL’s performance for the last quarter of FY08 remained ahead of its

peers, IOC and HPCL, due to higher proportion of non-fuel marketing

business and increase issuance of oil bonds as compared to its peers.

Defying the problem of rising under-recoveries, the Company has posted

profits for Mar’08 quarter. While the industry leader IOC has reported net

losses, HPCL’s pre-tax losses got converted into profits owing to the one-

time write back of tax provisions.

Despite reporting a healthy performance, FY08 was challenging for the

Company due to the soaring crude oil prices without a corresponding

Please see the end of the report for disclaimer and disclosures. -4-

Bharat Petroleum Corporation Limited RESEARCH

EQUITY RESEARCH July 0 4, 2008

increase in the domestic retail prices due to government’s administered price

regime. As a result, the OMCs had to bear the burden of huge

under-recoveries. Moreover, the price hike in petrol, diesel, and domestic

LPG by Rs. 5 per litre, Rs. 3 per litre, and Rs. 50 per cylinder, respectively,

by the government in June’08, provided a nominal relief to the OMCs. We

therefore believe that OMCs would still have to bear a significant portion of

under-recoveries along with the upstream companies and the government,

as a price hike of Rs. 21.4/litre of petrol, Rs. 31.6/litre of diesel, and Rs. 353

per LPG cylinder was required to absorb under-recoveries completely.

With the increasing burden of under-recoveries, BPCL would incur higher

borrowing cost to meet the rising working capital requirements. This would

further add to the existing pressure over margins. Further, the loss of

production due to planned shutdown of Kochi refinery would also aggravate

margin pressure. As a result, the Company would be compelled to import

higher priced crude and other products from other countries to meet the

growing demand.

At the current price of Rs. 228.3, the stock trades at a forward P/E of 7.2x

and 6x for FY09E and FY10E, respectively. Considering the insufficient price

revision and the tightened liquidity situation, we reiterate our Hold rating on

the stock.

Insufficient price revision and rising borrowing costs likely to keep margins under pressure

Key Figures (Consolidated)

Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%)

(Figures in Rs. mn, except per share data) (FY08-10E)

Net Sales 775,161 984,192 1,112,431 1,329,844 1,342,264 9.8%

EBITDA 17,041 45,196 37,037 32,153 36,873 (0.2%)

Adj. Net Profit 5,219 22,724 15,332 11,508 13,656 (5.6%)

Margins(%)

EBITDA 2.2% 4.6% 3.3% 2.4% 2.7%

NPM 0.7% 2.3% 1.4% 0.9% 1.0%

Per Share Data (Rs.)

Normalised EPS 14.4 62.8 42.4 31.8 37.8 (5.6%)

PER (x) 29.5x 4.8x 5.4x 7.2x 6.0x

Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666

-5-

Bharat Petroleum Corporation Limited RESEARCH

EQUITY RESEARCH July 0 4, 2008

Disclaimer This report is not for public distribution and is only for private circulation and use. The Report should not be reproduced or redistributed to any other person or person(s) in any form. No action is solicited on the basis of the contents of this report. This material is for the general information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Indiabulls Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investments and strategies discussed herein and also seek the advice of your financial adviser. Past performance is not a guide for future performance. The value of, and income from investments may vary because of changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject to change without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employees reserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions or information in this report change. In addition, ISL has no obligation to continue to publish reports on all the stocks currently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limited nor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage that may arise to any person from any error in the information contained in this report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject stock and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Indiabulls Securities Limited prior written consent. The information given herein should be treated as only factor, while making investment decision. The report does not provide individually tailor-made investment advice. Indiabulls Securities Limited recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. Indiabulls Securities Limited shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of National Stock Exchange or Bombay Stock Exchange.