Weak Operating Performance; Maintain REDUCE
Despite good performance in marketing segment, Bharat Petroleum Corporation (BPCL) has reported weak operating performance in 1QFY20 with EBITDA falling by 44% YoY and 55% QoQ to Rs21.8bn (in line with our estimate) led by lower refining throughput and margin. It reported a GRM of US$2.81/bbl in 1QFY20 vs. US$7.49/bbl in1QFY19. We believe 4% YoY fall in crude throughput was mainly due to Mumbai refinery upgradation for BS-VI fuel. Its net profit declined by 53% YoY and 66% QoQ to Rs10.7bn (11% above our estimate) mainly due to higher interest cost (+50% YoY and +28% QoQ). Notably, its debt increased by Rs15.5bn sequentially. Further, adoption of Ind AS-116 resulted into net Rs520mn decrease in PBT. In Jul’19, benchmark complex refining margin averaged at US$7/bbl, which has been corrected to below US$5/bbl in Aug’19. We believe complex GRM may remain weak, going ahead led by low crude differentials, while margin upliftment from the Kochi project may take some time. Further, the slowest rate retail outlet addition in FY19 and expansion focus more on rural and north east area could dilute its throughput. BPCL has added only 100 retail outlets in 1QFY20 vs. its guidance of 2,000/annum. In light of dismal quarterly performance, we maintain our REDUCE recommendation on the stock with a Target Price of Rs330, valuing it at 5.9x FY21E of EV/EBITDA.
Refining: BPCL’s refining EBITDA decreased by 78% YoY to Rs4.9bn in 1QFY20 mainly due to lower refining margin (US$2.8/bbl vs. US$7.5/bbl in 1QFY19) and 4% YoY fall in crude throughput. Notably, inventory losses stood at US$0.9/bbl. Adjusted GRM stood at US$3.7/ bbl, which was at a premium to benchmark Singapore
Oil Marketing: BPCL’s marketing EBITDA grew by 103% YoY to Rs18.1bn on higher net marketing margin on diesel (Rs2.2/lt) and other products (Rs1.7/lt). Its domestic product sales volume increased by 1.3% YoY, which was above the industry growth rate. Notably, Company’s diesel/petrol sales volume grew by 1%/9% YoY, which was below the industry average. BPCL’s diesel market share fell by 0.4% YoY and 0.3% QoQ, while it lost 0.2% YoY market share petrol retailing. Overall, India’s petroleum product consumption fell by 0.5% QoQ on account of industrial activity slowdown.
Outlook & Valuation
We expect BPCL earnings could be more uncertain than before (with every US$1/bbl change in GRM impacting FY20E EPS by 17%), which makes us uncertain about its valuation premium. We have assumed US$4.25/bbl=FY20E US$5.12/bbl=FY21E of total BPCL’s GRM (Avg. Sing GRM $3.5/ bbl in 1QFY20) and gross marketing margin of Rs2.4/lt. Further, aggressive capital spending for past few years (i.e. US$2.5bn for Kochi project) has also eroded its capital efficiency, dragging its RoCE/RoE. We expect BPCL’s RoCE/RoE to fall from 15%/22% in FY19 to 13%/20% in FY21E, as the Company is unlikely to sustain consistent growth in EBITDA and PAT. We maintain REDUCE recommendation on the stock with a Target Price of Rs330, valuing it at 5.9X FY21E EV/ EBITDA.
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