Bharat Petroleum –Hold- Anand Rathi

Bharat Petroleum Corp Ltd (BPCL) reported Q1 loss of Rs17.2 billion, in line with our estimates (versus Rs6.1bn profit a year ago), owing to absence of government compensation for under-recoveries, as expected.

The corporation reported GRMs of $3.57/bbl during the quarter. We expect the refining margin in FY11/12 to be low, in line with our expectation of weak regional and global refining margins. We expect this trend to last longer, as old, high-cost refinery capacities close down and new capacities stabilize.

We await clarity regarding the subsidy-sharing mechanism and diesel de-regulation. Hence, we continue to build in losses in both cooking fuels and auto fuels, with upstream companies sharing approx 33% of the subsidy burden. The rest would be borne by the government, up to the extent that OMCs can rein in losses.

We maintain FY11e and FY12e earnings at our Brent price assumption of $70/bbl, as we await clarity about the subsidy-sharing mechanism. Our earnings estimate is contingent on the subsidy-sharing formula finally adopted by the government.

We maintain our valuation at Rs595 based on 9.6x FY12e EPS, plus the value of investments at a 25% discount to the current market price and possible E&P upside. Unfavorable regulation, especially subsidy-sharing policy, volatile movements in crude and product prices, and the exchange rate.

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