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Core GRMs lower than peers on shutdown
* Bharat Petroleum (BPCL) reported EBITDA/PAT of Rs783mn/Rs4.95bn for Q3FY19, which came in Rs1bn/Rs1.7bn higher than our estimates on better GRMs/lower tax rate (16%). Core EBITDA/PAT/EPS were better at Rs34.1bn/Rs21.9bn/Rs11.1. The inventory loss stood at Rs33.3bn.
* Reported GRM of USD2.8/bbl had Rs12.9bn of inventory loss, implying a core GRM of USD6/bbl, better than our USD4.3 estimate but lower than peers, likely due to Kochi shutdown and Mumbai HCU outage. Marketing margin fell 2 qoq to Rs4.9/kg, up 34% yoy.
* We believe that after elections, marketing pricing power should improve, though refining would be volatile. Key positives are Kochi refinery normalizing and petchem adding up (the latter, we have not factored in). We raise our FY19E EPS by 3%, but are lowering target EV/EBITDA. We cut our target price by 3% to Rs375 and downgrade BPCL to Accumulate.
BPCL suffered Rs12.9bn/Rs20.4bn of refining/marketing inventory losses, while forex gains were Rs6.6bn. Refining throughput was down 1% qoq due to Kochi IREP turnaround. Overall marketing volumes grew 2% yoy to 10.7mmt, with domestic flat yoy. Petrol volumes were up 6% yoy, while diesel was flat yoy; petrol sales growth was in line/weaker vs. HP/IOCL. Other expenditure rose 3% qoq, while employee costs fell by 16%. Interest cost was up 3% qoq to Rs3.4bn, whereas other income jumped to Rs9.7bn, likely due to dividends. Gross debt fell from Rs239.6bn as of Q2-end to Rs227.7bn at Q3-end, while capex for Q3/9M was Rs26bn/Rs72bn. Depreciation increased 3% qoq. Kerosene under-recovery in Q3 stood at Rs2.7bn, which was fully compensated. The board declared an interim dividend of Rs11/share.
* Management guidance:
Capex guidance for FY19/20 is Rs74bn/Rs79bn. The Mumbai refinery HCU has started from shutdown in January.
*Valuation and outlook:
We share a similar view on all three OMCs as after elections, marketing pricing power should improve though refining would be volatile. We reduce our GRM assumption for BPCL to USD4.7/USD5.8 for FY20/21 but raise marketing margins based on 9MFY19 rate. Our FY20/21 EPS remain largely unchanged. We reduce our target EV/EBITDA multiples, but compared with IOCL/HPCL are 4-5% higher, due to drivers like petchem, which we have not built. We value BPCL’s refining/pipeline/marketing segments at 5.8/7.3/6.8x FY21E EV/EBITDA, while Rs85 comes from investments in listed entities, BORL, NRL and upstream. We downgrade BPCL to Accumulate from Buy, with a TP of Rs375 (11% upside).
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