September 25, 2010

www.fullertonsecurities.co.in Page | 1

-20

-10

0

10

20

30

40

50

Sensex BPCL

Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs

Strong Buy

Buy

Hold

Reduce

SellStrong Buy – Expected Returns > 20% p.a.

Buy – Expected Returns from 10 to 20% p.a.

Hold – Expected Returns from 0 % to 10% p.a.

Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk

Sell – Returns < 0 %

STOCK DATABSE / NSE Code

Bloomberg Code

No. of Shares (Mn)

Sensex / Nifty

PRICE DATA

CMP Rs (22nd Sep' 10)

Beta

Market Cap (Rs mn)

52 Week High-low

Average Daily Volume

STOCK RETURN (%)

30D 3M 6M 1Y

BPCL 13% 43% 52% 41%

Sensex 8% 12% 15% 18%

Nifty 8% 13% 15% 19%

SHARE HOLDING PATTERN (%)

Promoter

Institution

Non Institution

Total

1 Year Price Performance (Rel. to Sensex)

17.4

100.0

0.30

284,550

815/ 488.2

222,992

54.9

500547 / BPCL

BPCL IN EQUITY

362

19,942/5,991

787.1

27.7

Financial SnapshotProjections (Rs Mn) FY08A FY09A FY10A FY11E FY12E

Revenue 1,107,436 1,352,386 1,218,640 1,280,426 1,333,382

Y-o-Y Growth % 13.9% 22.1% -9.9% 5.1% 4.1%

EBIDTA 50,259 47,989 53,395 59,488 67,170

Y-o-Y Growth % -0.4% -4.5% 11.3% 11.4% 12.9%

PAT After MI 17,695 6,338 16,324 16,951 19,572

Y-o-Y Growth % -17.5% -64.2% 157.6% 3.8% 15.5%

EPS Rs 47.9 16.0 42.5 50.2 57.6

BVPS Rs 357.0 368.2 391.2 426.4 467.0

EBIDTA % 4.5% 3.5% 4.4% 4.6% 5.0%

NPM % 1.6% 0.5% 1.3% 1.3% 1.5%

ROE % 13.4% 4.3% 10.9% 11.8% 12.3%

PER x 15.7 13.7

P/B Ratio 1.8 1.7

BHARAT PETROLUEM CORPORATION LTD SELL

Bharat Petroleum Corporation Ltd (BPCL), a government‐owned company operating in

the refining and marketing segment. The company has also diversified into the

petrochemical feedstock and exploration and production segments.

• Bina refinery is expected to be operational in October 2010. The high complexity Bina

refinery would improve the overall complexity of BPCL refineries and would help improve

the Gross Refining Margins (GRMs).

• It has recently discovered Oil and Natural Gas in the Wahoo field, offshore Brazil and Natural

Gas in the Rovuma Basin, Area I, offshore Mozambique.

• BPRL has entered the Shale Gas space and has acquired stake for farming two blocks in

Australia and would invest up to AUD 15 million for exploration and drilling funding.

• At the current price levels, the stock has factored for the upsides. Any reforms in respect to

Deregulation of Diesel prices or Clarity on the subsidy sharing mechanism is not likely in the

near or mid-term considering the political heat and inflationary heat. Any upside from the

E&P sector is highly uncertain and would take time to accrue.

• We expect BPCL’s revenues to grow at a CAGR of 4.6% over FY2010-12 to Rs 1333.4bn by

FY2012. We further estimate that PAT would grow at a CAGR of 9.5% over FY2010-12 to Rs

19.6bn in FY2012 from Rs 16.3bn in FY2010.

Based on a consolidated FY12 P/E multiple of 12, the fair value for the

company works out to Rs 691

September 25, 2010

www.fullertonsecurities.co.in Page | 2

LPG

12%

Aviation

3%

Direct

22%

Retail

62%

Lubricants

1%

Market Sales Volume (MMT)

19.86 20.37 21.03 21.6323.45

25.7927.16 27.70

0.00

5.00

10.00

15.00

20.00

25.00

30.00

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Trend in Sales

Sales Volume in MMT

BPCL is an Oil and Gas major with focus on the downstream segments. BPCL operates two refineries at Mumbai and Kochi.

The Kochi refinery’s capacity was recently expanded by 2 Million Metric Tonne (MMT) to 7.5 MMT. BPCL with Oman Oil

Company has set up a grass root refinery with 9.1 Nelson Complexity Index of 6 MMT capacity at Bina which is expected to

be operational in October, 2010. BPCL has a controlling stake in Numaligarh Refinery Limited with a capacity of 3 MMT. The

company has upgraded its refineries to Euro IV which would improve GRMs. BPCL’s total refining capacity is 38.5 MMT.

The company entered the upstream business in 2003 through its subsidiary Bharat Petro Resources Ltd (BPRL). BPRL has

jointly acquired participating interests in 26 exploration blocks; of which 10 are in Brazil, 9 in India, 2 in Australia and UK and

1 each in Oman, Mozambique and East Timor. About 85% of the total acreage is offshore and rest is onshore. All blocks are

at various stages of exploration and discoveries have been made in one block in Brazil and Mozambique.

BPCL is present in liquefied natural gas (LNG) through a 12.5% stake in Petronet LNG. It entered the city gas distribution

(CGD) business with 22.5% stake in Indraprastha Gas (IGL). BPCL also has interests in other CGD projects such as Sabarmati

Gas (25% stake), Central UP Gas (22.5%) and Maharashtra Natural Gas (22.5%).In the LPG space, BPCL has a 25.8% market

share with 2,187 distributors and reaches 28 million households. In the retail segment, BPCL operates 8,691 petrol pumps &

plans to increase this to approximately 9000 by 2011. In the aviation segment, the company is present in 30 airports in India.

BPCL plans to expand its refining capacity to 50MMT by 2015.

Subsidy in respect to the under recoveries is expected from the government in the 2QFY11 or 3QFY11

Key Risks and Concerns… While petrol prices have been deregulated, the subsidy overhang remains with under recoveries on LPG, Kerosene and

Diesel. Also, with no specific formula for subsidy sharing the concerns persist. Further rise in oil prices or depreciation of

Rupee will add to the subsidy burden. Decontrol of fuel prices will increase competition in the retail segment with the

entry of private players. Reliance Industries and Shell already have some presence in the retail segment. The long

gestation and uncertainty in the E&P segment would add to the concerns and the revenues from this segment could take

time to accrue. Also, with domestic airlines bleeding heavily have large outstanding dues with Oil Companies and this can

affect BPCL going ahead.

BUSINESS PROFILE

September 25, 2010

www.fullertonsecurities.co.in Page | 3

0%

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Margins(%)

Revenues (Rs bn)

Annual Revenues & Margins

Revenue (Rs mn) PAT Margins EBITDA Margins

-10%

-5%

0%

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10%

15%

20%

0

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100

150

200

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Margins(%)

Revenues (Rs bn)

Quarterly Performance

Net Revenue (Rs mn) EBITDA Margins

Peer Group Comparison

CompaniesRevenue

(Rs. mn)

EBIDTA

Margin (%)

PAT Margin

(%)

ROE

(%)

P/E

(x)

P/B

(x)

CMP

(Rs.)

FV

(Rs.)

BPCL 1,218,640 4% 1% 11% 18.5 2.0 787 10

HPCL 1,087,372 4% 1% 26% 14.8 3.9 540 10

IOC 2,693,663 7% 4% 19% 10.8 2.1 434 10

RIL 1,920,919 17% 8% 12% 21.0 2.6 1019 10

* FY10 consolidated figures

BPCL sales for 1QFY11 rose 34% to Rs 342.12bn compared to corresponding previous year period while bottomline

of the company turned to losses of Rs 17.18bn. The bottom line was adversely affected due to higher crude oil and

product prices which could not be fully passed on to the consumers. Earlier part of the under recoveries was

financed by government in the form of oil bond or cash which was missing in the current quarter. Foreign exchange

losses were Rs 3.38bn against gains of Rs 2.33bn in Q1FY'10. The Average Gross Refining Margin during the quarter

stood at USD3.57 per barrel compared to USD3.17 per barrel. Discounts received from upstream companies stood at

Rs 15.49bn for the quarter ended June 2010 compared to Rs 1.57bn in the corresponding previous year period.

Peer Comparison BPCL operates at margins comparable to its peers. However BPCL trades at the higher P/E compared to its peers.

BPCL commands a premium compared to the peers on the back of diversified revenue stream and better gearing.

However at the current price has factored BPCL's capacity expansion initiatives in its existing refineries, initial

successes in exploration and production in South American and African waters, commencement of the high-

complexity Bina refinery (full commissioning expected soon), and recent foray into shale gas fields in Australia.

BUSINESS PERFORMANCE

Depreciation rose 73% to Rs 4.01bn which includes Rs 1.56bn on account of LPG cylinders depreciated at 100%.

The stock has given 43% return since the partial fuel price deregulation.

September 25, 2010

www.fullertonsecurities.co.in Page | 4

Financial Analysis and ProjectionsParticulars (Rs Mn) FY08A FY09A FY10A FY11E FY12E

Net Revenue 1,107,436 1,352,386 1,218,640 1,280,426 1,333,382

Other Income 14,566 14,697 23,652 17,450 23,772

Total Income 1,122,002 1,367,083 1,242,292 1,297,877 1,357,154

Operating Expenditure 1,071,743 1,319,094 1,188,897 1,238,389 1,289,984

Depreciation 12,921 12,617 14,446 16,860 19,801

EBIT 37,338 35,372 38,949 42,629 47,368

EBIT Margin (%) 3.4% 2.6% 3.2% 3.3% 3.6%

Interest 7,149 24,043 11,247 13,649 14,022

Profit Before Tax 30,189 11,329 27,703 28,980 33,346

Less: Tax 11,064 4,088 10,503 10,867 12,573

Profit After Tax 19,125 7,241 17,200 18,113 20,773

Minority Interest 1,430 904 876 1,162 1,201

PAT After MI 17,695 6,338 16,324 16,951 19,572

PAT Margin (%) 1.6% 0.5% 1.3% 1.3% 1.5%

ROE (%) 13.4% 4.3% 10.9% 11.8% 12.3%

EPS (Rs) 47.9 16.0 42.5 50.2 57.6

BVPS (Rs) 357.0 368.2 391.2 426.4 467.0

Valuation Ratios (x) FY11E FY12E

P/E 15.7 13.7

P/B 1.8 1.7

Based on a consolidated

FY12 P/E multiple of 12, the

fair value for the company

works out to Rs 691

VALUATION We expect BPCL’s revenues to grow at a CAGR of 4.6% over FY2010-12 to Rs 1333.4bn by FY2012. We further

estimate that PAT would grow at a CAGR of 9.5% over FY2010-12 to Rs 19.6bn in FY2012 from Rs 16.3bn in

FY2010.

Based on a consolidated FY12 P/E multiple of 12, the fair value for the company works out to Rs

691

We recommend a ‘SELL’ rating on the stock.

September 25, 2010

www.fullertonsecurities.co.in Page | 5

Board of Directors

Director Name Current Position Description

Shri. S. Radhakrishnan Executive Chairman

Shri. S. Radhakrishnan has been appointed as Executive Chairman of the Board, Managing Director, Director - Marketing of Bharat

Petroleum Corporation Ltd effective August 19, 2010. He is a B.Tech (Mech.) from Indian Institute of Technology, Madras and M.B.A.

from Indian Institute of Management, Bangalore. He has wide ranging experience in marketing of petroleum products. Prior to

appointment as Director (Marketing), he was holding the position of Managing Director in Bharat Shell Ltd. He is also Director on the

Boards of Kochi Refineries Ltd. and Numaligarh Refinery Ltd., Indraprastha Gas Ltd., Sabarmati Gas Ltd. and Bharat Shell Ltd.

Shri. Sudhir K. JoshiFinance Director,

Whole-Time Director

Shri. Sudhir K. Joshi serves as Finance Director, Whole-Time Director of Bharat Petroleum Corporation Ltd. He is a member of the

Institute of Chartered Accountants of India and M.B.A. from the University of Hull, United Kingdom. Prior to his appointment as Director

(F), he was responsible for the overall fund management, risk management, corporate accounts and budgeting. He was also closely

associated with key initiatives undertaken by the Company including implementation of SAP and drawing up of the Corporate Credit

Policy and Commodity Risk Management Policy. Besides, Shri Joshi was closely associated with key initiatives impacting the Oil

Industry in India. He was a member of the Study Group formed for the purpose of preparing a Long Term Perspective Plan for the Oil

Industry in India which had come out with the report titled ‘Hydrocarbon Perspective:2010 – Meeting the Challenges. He was awarded

the ‘Business Today CFO’ under the category “CFO in a PSU”. for the year 2008-09. In addition to BPCL, he also holds the position of

Director in Numaligarh Refinery Ltd., Bharat Oman Refineries Ltd, Bharat PetroResources Ltd., Bharat PetroResources JPDA Ltd. and

Bharat Stars Services Pvt. Ltd. Shri. S.K.Joshi was appointed as Director (Finance) on March 8, 2006. He is liable to retire by rotation at

the ensuing AGM and being eligible, offers himself for re-appointment.

Shri. Seetharaman Mohan

Director - Human

Resources, Whole-

Time Director

Shri. Seetharaman Mohan serves as Director - Human Resources, Whole-Time Director of Bharat Petroleum Corporation Ltd. He is a

Mechanical Engineer from Birla Institute of Technology & Science, Pilani and M.B.A. from Indian Institute of Management, Bangalore.

Prior to being appointed as Director (Human Resources), he has held various key positions in Human Resource Development,

Marketing, Supply & Distribution and Engineering & Projects. In addition to BPCL, he is a Director on the Boards of Petronet India Ltd

and Petronet CCK Ltd. He is a British Council Scholar and has also attended programmes at Stanford and Kellogg, U.S.A.

Shri. Raj Kishore SinghDirector - Refineries,

Whole-Time Director

Shri. Raj Kishore Singh serves as Director - Refineries, Whole-Time Director of Bharat Petroleum Corporation Ltd. He is a Mechanical

Engineer and has held various assignments, both in the Refinery and Marketing divisions. He has attended a Management

Development Programme at IIM, Ahmedabad, Materials Management Programme at ASCI, Hyderabad and Logistics Management

Course at University of Tenesse in U.S.A. He has also headed a group constituted for transfer of technology of LPG equipment from

Denmark / Italy and he was closely associated with the World LPG Association as an active member of their subcommittees. In addition

to BPCL, he also holds the position of Director in Numaligarh Refinery Ltd., Bharat Oman Refineries Ltd. and Bharat PetroResources Ltd.

Shri R. K. Singh was appointed as Director (Refineries) on March 8, 2006. He is liable to retire by rotation at the ensuing AGM and being

eligible, offers himself for re-appointment.

Shri. Alkesh Kumar Sharma Director

Shri. Alkesh Kumar Sharma is Director of Bharat Petroleum Corp Ltd., since June 30, 2010. He is an Secretary (Investment Promotion),

Government of Kerala, is a senior IAS officer. In addition to being on the Board of BPCL, he also holds Directorship in other companies

including Kerala State Industrial Development Corporation Ltd, Geojit BNP Paribas Financial Services Ltd, Brahmos Aerospace

Thiruvananthapuram Ltd, Infrastructures Kerala Ltd, Indian Rare Earths Ltd Kerala Minerals & Metals Ltd, etc. The Company has received

a notice under Section 257 of the Companies Act, 1956, from a Member proposing his name as Director of the Company.

Prof. S. K. Barua

Part-Time Non-

Executive

Independent Director

Prof. S. K. Barua serves as Part-Time Non-Executive Independent Director of Bharat Petroleum Corporation Ltd. He is an M.Tech in

Industrial Engineering and Operations Research and holds a Doctorate in Management. He joined the faculty of Indian Institute of

Management, Ahmedabad in 1980. His specific areas of interest include Capital Market, International Finance, Operations Research,

Decision Support Systems, Management Information & Control System and Corporate Financial Management. He is a visiting professor

to academic institutions in the USA, Netherlands, Singapore & Cyprus and has authored a number of books and case studies in

Management. He is a consultant to many public and private organisations in the manufacturing, banking and financial services sectors.

Besides, he has handled various assignments as Advisor to Reserve Bank of India, FICCI and the Mumbai and National Stock Exchanges.

In addition to BPCL, he holds the Directorship in a number of Companies i.e., Coal India Ltd., Paras Pharmaceuticals Ltd., Torrent Power

Ltd. etc.

Prof. N. Venkiteswaran Director Prof. N. Venkiteswaran currently serves as a director on the board of Bharat Petroleum Corporation Ltd.

Shri. Pradeep Kumar Sinha

Part-Time Non-

Executive

Independent Director

Shri. Pradeep Kumar Sinha serves as Part-time Non-Executive Director of Bharat Petroleum Corporation Ltd . He is additional Secretary

and Financial Advisor, Ministry of Petroleum & Natural Gas, is a senior IAS officer belonging to the1977 Batch of U.R Cadre. He is a

postgraduate in Economics from Delhi School of Economics and M. Phil in Social Sciences and has a Masters Diploma in Public

Administration. In addition to BPCL, he holds Directorship in Indian Oil Corporation Ltd. and Hindustan Petroleum Corporation Ltd.

Shri. I.P.S Anand Director Shri. I.P.S Anand currently serves as a director on the board of Bharat Petroleum Corporation Ltd.

Shri. Haresh. M. Jagtiani Director Shri. Haresh. M. Jagtiani currently serves as a director on the board of Bharat Petroleum Corporation Ltd.