BPCL, HPCL and IOCL) declared their Q4FY07 and FY07 results. FY07 profits for OMCs were substantially higher than our estimates. Higher than expected support from government (oil bonds) and upstream sector (crude discounts) were responsible for the seemingly stellar performance of the OMCs. Out of the total FY07 under-recovery of INR 493 bn, support from oil bonds and upstream were at 49% and 42%, respectively, leaving only ~9% of gross under-recoveries to be borne by the OMCs

We believe that FY07 support to OMCs is an aberration as (1) The support is significantly higher than the 1/3:1/3:1/3 subsidy sharing decided earlier, and (2) The support levels are higher compared to FY06 when GOI bonds, upstream companies and refiners provided for 65% of total under-recovery. Going forward, we believe that upstream discount at FY07 levels is unwarranted. We have factored in 50% support by the government in the form of oil bonds and 33% support from upstream companies (2/3^rd of the under-recovery after GOI bonds) with the OMCs having to bear 17% of their total under-recovery.

Based on our new oil price and INR/USD assumptions and revised under-recovery sharing between government, upstream and OMCs, we have revised our FY08 and FY09 earnings estimates for the oil marketing companies. For BPCL, our revised consolidated FY08 and FY09 EPS estimates stand at INR 52.4/share and INR 62.1/share. For HPCL, our revised FY08 and FY09 EPS stand at INR 38.2/share and INR 56.3/share and for IOCL we have revised our FY08 and FY09 EPS estimates to INR 59.9/share and INR 64.8/share.

We estimate the fair value of BPCL, HPCL and IOCL at INR 376, INR 266 and INR 529, respectively. Both, BPCL and IOCL provide marginal upside from current levels. Though HPCL’s fair value is lower than CMP, it is explainable considering the higher earnings growth in FY09 due to increase in refining capacity and complexity. Further, current political scenario makes it unlikely that the government may reduce its controls on the sector. We believe that any reduction in crude price may only provide an opportunity for the government to reduce the auto fuel prices (run up to the elections in 2009). On the other hand the low P/BV and high dividend yield valuations provide support to the oil marketing companies. We therefore downgrade the R&M stocks (HPCL, BPCL, and IOCL) from ‘BUY’ to ‘ACCUMULATE’.    

HPCL

Net revenue of the company was up 4.9 % Y-o-Y and down 1.4% Q-o-Q at INR 218 bn

HPCL’s blended GRMs improved to USD 4.23/bbl from USD 2.47/bbl in Q3FY07 and USD 3.42/bbl in Q4FY06. Refinery throughput improved slightly to 4.2 mmt in Q4FY07

Total marketing volumes increased to 5.7 mmt from 5.4 mmt in Q4FY07. HPCL received oil bonds worth INR 10.0 bn compared to INR 23.5 bn received in Q4FY06 and INR 10.3 bn received in Q3FY07. Upstream support stood at INR 11.4 bn compared to INR 5.5 bn in Q3FY07 and INR 11.8 bn in Q4FY06.

Net profit was up 34.9% Q-o-Q but down 72.7% Y-o-Y. 

BPCL

·         Net revenues of the company was up 6.1 % Y-o-Y and flat Q-o-Q at INR 241 bn. 

·         BPCL’s blended GRMs improved significantly to USD 5.69/bbl from USD 2.88/bbl in the previous quarter. Refinery throughput improved to 5.3 mmt from 4.7 mmt in Q3FY07 and 4.9 mmt in Q4FY06.

·         BPCL’s blended GRMs improved significantly to USD 5.69/bbl from USD 2.88/bbl in the previous quarter. Refinery throughput improved to 5.3 mmt from 4.7 mmt in Q3FY07 and 4.9 mmt in Q4FY06.

·         Net profit was up 121% Q-o-Q and down 60.2% Y-o-Y. 

·         BPCL reported net revenues at INR 976 bn up 27% Y-o-Y and Net profits increased to INR 18.1 bn from INR 2.9 bn in FY06. 

·         Refinery throughput increased to 19.8 mmt from 17.2 mmt in FY06. GRMs for Kochi refinery improved to USD 3.5/bbl from USD 3.2/bbl in FY06 and GRMs for the Mumbai refinery increased to USD 3.6/bbl from USD 1.6/bbl in FY06. 

·         Total marketing volumes increased to 23.4 mmt from 21.6 mmt in FY06. Of the total under-recovery of INR 108 bn in FY07 BPCL’s share decreased to 8% in FY07 from 20% in FY06.

IOCL

IBP has been amalgamated with IOC with effect from 2nd May 2007.   

The approved swap ratio is 110:100 (110 IOC shares for every 100 shares of IBP). 

As a result of amalgamation IOC’s equity has increased by 24 mn shares to 1192 mn shares .

Expect OMCs to share higher proportion of under-recoveries

We have increased our WTI crude FY08 crude forecast to USD 58/bbl while maintaining our FY09 crude forecast at USD 50/bbl. We have also revised our INR/USD assumption from 44.0 to 43.0, after the recent bout of currency appreciation (Rupee appreciation is positive for marketing segment and negative for the refining segment).

We expect the industry to report FY08 and FY09 gross under-recoveries at INR 310 bn and INR 159 bn, respectively. We have built in a government support in the form of oil bonds at the same proportion for last two years - 50% of gross under-recoveries. However, we believe upstream discount of 42% (of gross under-recoveries) received by OMCs in FY07 is on the higher side and hence have factored in 33% contribution from upstream companies (2/3^rd of the under-recovery net of GOI oil bonds). Thus, we factor in 17% net under-recovery for the OMCs in FY08-FY09.

oil price and INR/USD assumptions and revised under-recovery sharing between government, upstream and OMCs, we have revised our FY08 and FY09 earnings estimates for the oil marketing companies. For BPCL, our revised consolidated FY08 and FY09 EPS estimates stand at INR 52.4/share and INR 62.1/share. For HPCL, our revised FY08 and FY09 EPS stand at INR 38.2/share and INR 56.3/share and for IOCL we have revised our FY08 and FY09 EPS estimates to INR 59.9/share and INR 64.8/share.