Inventory losses and shutdown of BPCL’s refinery has resulted in a muted 1Q performance. However, we maintain our BUY owing to its impeccable refining assets and healthy free cash flows (Rs 66.55bn) over FY21-22E.
HIGHLIGHTS OF THE QUARTER
* BPCL’s 1QFY20 EBITDA came in at Rs 21.8bn (down 43.7/54.6% YoY/QoQ) owing to
(1) Planned shutdown of its Mumbai refinery,
(2) Fall in refining GRMs and
(3) Lower blended gross marketing margins.
Adjusting for inventory and forex losses, core EBITDA was Rs 26.01bn (+36.8/-37.7% YoY/QoQ).
* Refining: Refinery throughput was 7.45mmt (-3.7/- 9.3% YoY/QoQ). Utilisation was at 103/112% for the Mumbai/Kochi refineries. Core GRM (excluding inventory losses of USD 0.9/bbl) stood at USD 3.68/bbl (USD 4.2/2.6 in 1Q/4QFY19) which was higher than the benchmark. GRMs were impacted owing to refinery shut down. GRMs are expected to increase from the current levels with gradual increase in the share of sour crude at their Kochi refinery from 80% now to 100%.
* Marketing: Domestic marketing volume was 11.11mmt, +1.3/-2.1% YoY/QoQ. Thus, BPCL has gained market share on an annual basis as domestic petroleum product consumption was up merely 0.9% YoY. Blended gross margins stood at Rs 4.32/lit (+19.4/- 27.8% YoY/QoQ). Sequential fall in marketing margins is attributable to the inability to pass on rise in product prices in an election packed quarter. We foresee normative margins restoring in ensuing quarters.
* Update on Petchem project at Kochi: Execution of the Propylene Derivatives Petrochemical Project (PDPP) is on track. Commissioning will start in 3QFY20 and the final product will be out by the end FY20. Polymer Grade Propylene produced will be used as a feedstock to produce value added products namely Acrylic Acid, Oxo Alcohols and Acrylates.
* Key monitorable: Restoration of normative marketing margins post elections and GRMs at Kochi.
For BPCL, core GRMs are expected to improve further by USD 0.5 to 1.0/bbl by FY22E on account of gradual increase in share of heavy and cheap crude at its Kochi refinery. Additionally, restoration of marketing margins as elections have concluded is a key positive. Our SOTP target is Rs 434/share (5.5x Jun 21E EV/e for standalone refining, 6.0x Jun 21E EV/e for marketing, and pipeline business and Rs 129/sh for other investments). Maintain BUY.
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