21 March 2022 Company Update BPCL

1 21 March 2022 Company Update BPCL HSIE Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters Favourable risk-reward We upgrade bharat petroleum Corporation (BPCL) to BUY, with a target price of INR 420, given it has corrected ~30% from its peak over the last six months, owing to pressure on auto-fuel marketing margins and an increase in LPG under-recoveries. We believe the recent correction is overdone, and see limited downside from current levels, led by: (1) improvements in refining margins, (2) resumption of daily auto-fuel price changes, and (3) a gradual reduction in LPG under-recoveries. Refining margin improvement to offset marketing margin pain: In Q4TD, gasoline cracks have improved to USD (at six-year high) and gasoil cracks have improved to USD (two-year high), led by improvement in global petroleum product demand, after COVID recovery, resulting in an improvement in gross refining margins (GRMs) for oil marketing companies (OMCs).

2 For BPCL, we believe that the stabilisation of the PDPP unit at Kochi by H2FY23 should contribute ~USD 1/bbl improvement in refining GRMs. We expect overall BPCL GRMs to improve to USD per bbl over FY22/23/24E vs USD in FY21. Every USD 1/bbl improvement in GRM increases BPCL s FY23/24 EPS by 24/19% or INR per share. Auto fuel margins have bottomed, improvement to be gradual: Given the prevailing concerns on global oil supply and demand recovery, the average Brent crude oil price in Q4TD surged to ~USD 93/bbl (21% QoQ) vs ~USD 44/bbl in FY21 (up 111%). A combination of a sharp surge in crude oil price and pausing of revision in retail auto fuel and LPG prices due to state assembly elections has resulted in contraction of auto-fuel marketing margins and increase in LPG under-recoveries for the OMCs.

3 In Q4TD, the estimated average auto fuel margins declined to INR , from INR in FY21. With the assembly elections now over, we expect OMCs to resume daily revision of retail auto fuel prices, albeit gradually. Given the increase in oil prices, our calculation suggests that OMCs need to take ~INR 11/ltr price hike to factor in the rise. Additionally, the government has announced an LPG subsidy of only INR 40bn in the recent budget, which we believe should be revised upwards. Or retail price should be raised, given the increase in crude oil price, so as to lighten the LPG under-recovery burden on OMCs. Therefore, for BPCL, we factor in blended gross marketing margins of INR per litre for FY22/23/24E, down from INR in FY21.

4 Undemanding valuation: Our SOTP valuation factors in BPCL s refining segment at 5x EV/E, marketing and pipeline segments at 6x EV/E and investments at 25% discount to CMP. At CMP, BPCL is trading at FY23E EPS and FY23E EV/EBITDA (vs. the five-year average of PER and EV/E). Financial summary (consolidated) INR mn FY20 FY21 FY22E FY23E FY24E Net Sales 2,846 2,302 3,679 5,115 4,756 EBITDA 89 213 178 147 178 APAT 31 162 100 74 96 AEPS (INR) P/E (x) EV/EBITDA(x) RoE (%) Source: Company , HSIE Research BUY CMP (as on 17 Mar 2022) INR 364 Target Price INR 420 NIFTY 17,287 KEY CHANGES OLD NEW Rating ADD BUY Price Target INR 435 INR 420 EPS % FY22E FY23E KEY STOCK DATA Bloomberg code BPCL IN No.

5 Of Shares (mn) 2,169 MCap (INR bn) / ($ mn) 790/10,616 6m avg traded value (INR mn) 2,337 52 Week high / low INR 470/331 STOCK PERFORMANCE (%) 3M 6M 12M Absolute (%) ( ) ( ) ( ) Relative (%) ( ) ( ) ( ) SHAREHOLDING PATTERN (%) Sep-21 Dec-21 Promoters FIs & Local MFs FPIs Public & Others Pledged Shares Source: BSE Harshad Katkar +91-22-6171-7319 Nilesh Ghuge +91-22-6171-7342 Akshay Mane +91-22-6171-7338 Rutvi Chokshi +91-22-6171-7356 Page | 2 BPCL: Company Update Exhibit 1: Gasoline and gasoil cracks have improved gradually Source: Company , HSIE Research | Note: Q4FY22 is till date Exhibit 2: OMCs retail auto fuel margins turned negative in Q4 Source: Company , HSIE Research | Note: Q4FY22 is till date Exhibit 3: Change in estimates (consolidated) Y/E Mar (INR/sh) FY22E EPS FY23E EPS FY24E EPS Target Price Old New % Ch Old New % Ch Old New % Ch Old New % Ch BPCL ( ) ( ) ( ) 435 420 Source: Company , HSIE Research Exhibit 4: Target price and earnings sensitivity (Consolidated) Target Price (Rs/sh) Target Price (% chg) EPS (Rs/sh) Chg in EPS (%) FY23 FY24 FY23 FY24 HSIE 420 - - - USD 1/bbl chg in GRMs 475 chg in gross marketing margin 500 Source.

6 Company , HSIE Research - Retail auto fuel margins(Rs/ltr)( )( )( )( ) 1 QFY202 QFY203 QFY204 QFY201 QFY212 QFY213 QFY214 QFY211 QFY222 QFY223 QFY224 QFY22(USD/bbl)GasolineNaphthaJet KeroGasoilFOLPG Page | 3 BPCL: Company Update Exhibit 5: BPCL P/E band chart Source: Company , HSIE Research Exhibit 6: BPCL EV/EBITDA band chart Source: Company , HSIE Research Exhibit 7: Consolidated peer set comparison Company name CMP (INR) RECO TP (INR) Upside (%) P/E (x) P/B (x) EV/EBITDA (x) RoE (%) FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E bharat petroleum Corporation 356 BUY 420 Reliance Industries 2,403 ADD 2,820 Indian Oil Corporation 122 ADD 140 Hindustan petroleum Corporation 278 ADD 345 SK Innovation co ltd* NR NR NA S-Oil corp* NR NR NA Idemitsu Kosan Co ltd* NR NR NA Thai Oil PCL* NR NR NA Bangchak Corp PCL* NR NR NA NA Source.

7 Company , Bloomberg, HSIE Research | *Note: CMP for global refiners is in USD; consensus estimates Exhibit 8: HSIE vs consensus estimates (INR/sh) HSIE Bloomberg consensus HSIE vs consensus FY22E FY23E FY24E TP FY22E FY23E FY24E TP FY22E FY23E FY24E TP BPCL 420 496 3% -28% -12% -15% Source: Bloomberg, HSIE Research (x)Peak(x)Avg(x)Min(x)3-year avg EV/E (x)5-year avg EV/E (x) (x)Peak(x)Avg(x)Min(x)3-year avg P/E (x)5-year avg P/E (x) Page | 4 BPCL: Company Update Financials (Consolidated) Income Statement (INR bn) FY20 FY21 FY22E FY23E FY24E Net Revenues 2,846 2,302 3,679 5,115 4,756 Growth % ( ) ( ) ( ) Raw Material 2,526 1,874 3,257 4,702 4,291 Employee Cost 40 49 49 55 64 Other Expenses 190 166 195 210 224 EBITDA 89 213 178 147 178 EBITDA Margin (%) EBITDA Growth (%) ( ) ( ) ( ) Depreciation 41 43 44 49 53 EBIT 49 170 134 99 125 Other Income (Including EO Items) 0 75 24 28 30 Interest Cost 26 17 29 31 31 PBT 23 228 129 96 124 Taxes (0) 51 29 21 28 RPAT 23 176 100 74 96 EO (Loss) / Profit (Net Of Tax) APAT 23 176 100 74 96 Share of associates and minority interest 8 (15)

8 - - - Consolidated Net Profit (Adjusted) 31 162 100 74 96 APAT Growth % ( ) ( ) ( ) AEPS EPS Growth % ( ) ( ) ( ) Source: Company , HSIE Research Balance Sheet (INR bn) FY20 FY21 FY22E FY23E FY24E SOURCES OF FUNDS Share Capital 20 21 21 21 21 Reserves And Surplus 346 515 537 551 603 Net Worth 365 536 558 571 624 Minority Interest 21 - - - - Long-term Debt 439 434 480 470 440 Short-term Debt 178 42 47 87 67 Total Debt 616 476 527 557 507 Net Deferred Taxes 62 49 49 52 57 Long-term Provisions & Others 20 22 30 32 34 Total liabilities 1,084 1,083 1,164 1,213 1,221 APPLICATION OF FUNDS Net Block 602 641 738 789 835 CWIP 178 171 163 171 179 Investments 218 200 200 200 200 LT Loans And Advances 50 53 55 57 58 Other Non-current assets 29 25 28 30 33 Total Non-current Assets 1,076 1,090 1,183 1,246 1.

9 306 Inventory 222 267 426 599 552 Debtors 54 78 124 166 156 Cash And Cash Equivalent 64 149 91 74 95 Loans And Advances 7 1 1 1 2 Other Current Assets 86 24 25 25 25 Total Current Assets 433 520 667 865 830 Creditors 131 163 310 450 408 Other Current Liabilities & Provns 293 364 377 448 507 Total Current Liabilities 424 527 687 898 914 Net Current Assets 8 (7) (19) (34) (84) Total Assets 1,084 1,083 1,164 1,213 1,221 Source: Company , HSIE Research Page | 5 BPCL: Company Update Cash Flow Statement (INR bn) FY20 FY21 FY22E FY23E FY24E Reported PBT 23 228 129 96 124 Non-operating & EO Items 8 (90) (24) (28) (30) Interest Expenses 26 17 29 31 31 Depreciation 41 43 44 49 53 Working Capital Change 34 101 (45) (3) 72 Tax Paid (6) (63) (29) (18) (24) OPERATING CASH FLOW ( a ) 125 235 103 126 226 Capex (190) (76) (132) (107) (108) Free Cash Flow (FCF) (66) 159 (29) 19 118 Investments (27) 18 - - - Non-operating Income 0 75 24 28 30 Others (18) 1 (5) (4) (5) INVESTING CASH FLOW ( b ) (235) 18 (113) (84) (82) Debt Issuance/(Repaid) 187 (141) 51 30 (50) Interest Expenses (26) (17) (29) (31) (31) FCFE 95 1 (7)

10 18 38 Share Capital Issuance - 1 - - - Dividend (41) (196) (42) (30) (41) Others (11) 184 (28) (28) (1) FINANCING CASH FLOW ( c ) 110 (168) (48) (60) (123) NET CASH FLOW (a+b+c) (1) 85 (58) (17) 21 EO Items, Others Closing Cash & Equivalents 64 149 91 74 95 Source: Company , HSIE Research Key Ratios FY20 FY21 FY22E FY23E FY24E PROFITABILITY % EBITDA Margin EBIT Margin APAT Margin RoE Core RoCE RoCE EFFICIENCY Tax rate % ( ) Asset Turnover (x) Inventory (days) 29 42 42 43 42 Debtor (days) 7 12 12 12 12 Other Current Assets (days) 12 4 3 2 2 Payables (days) 19 32 35 35 35 Other Curr Liab & Prov (days) 38 58 37 32 39 Cash conversion cycle (days) (9) (31) (15) (11) (17) Net Debt/EBITDA (x) Net D/E Interest Coverage PER SHARE DATA (Rs)