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Outperformance prevail; net debt plummets – privatisation plausible

* BPCL’s 2QFY22 results surpassed our estimates, driven by a better-thanexpected margin performance – with both reported GRM (at USD6/bbl) and implied marketing margin (at INR6.1/lit) coming in higher than our estimates.

* Refining throughput (+5% QoQ) and marketing sales volume (+3% QoQ) were in line with our estimates - on the back of demand recovery post the second COVID wave. BPCL remains confident of achieving 100% utilisation of its refining nameplate capacity in FY22.

* Technical debottlenecking at the company’s PDPP plant in Kochi is underway and management expects the three units to contribute significantly from 4QFY22. Management expects the GRM to improve by USD1/bbl even if margins normalise from hereon.

* Singapore GRM improved QoQ in 2QFY22, led by an improvement in gasoline, ATF, and naphtha cracks amid hurricane-led supply disruptions. It further improved to an average of USD7.5/bbl in Oct’21, as demand continued to outweigh supply.

* Net debt at the end of 1HFY22 for standalone declined to INR99b (from 193b at the end of FY21), while consolidated remained flat at INR384b. The company has announced an interim dividend of INR5/share.

* There is no clear calendar of events, although management expects the privatisation process to be completed by the end of FY22. We share the optimism on BPCL’s privatisation and reiterate Buy.

Higher-than-estimated margins drive outperformance

* Reported GRM came in higher than our estimate at USD6.0/bbl (v/s USD4.1 in 1QFY22). Refining throughput was in-line at 7.2mmt (+27% YoY, +5% QoQ). The use of high sulphur as a % of total crude stood at 66% (higher YoY and QoQ).

* Implied marketing margin (incl. inv.) was higher than our estimate at INR6.1/lit (v/s our est. of INR5.4, -8% YoY, +5% QoQ). Marketing volumes were in-line at 9.9mmt (+11% YoY, +3% QoQ).

* Thus, EBITDA came in at INR44.8b (+16% YoY, +36% QoQ). Forex gain amounted to INR0.9b in 2QFY22. Reported PAT stood at INR26.9b – translating into an EPS of INR12.9 (v/s our est. of INR6.2).

* For 1HFY22, EBITDA was flat YoY at INR78b, with adj. PAT at INR43b.

* Refining and marketing volumes grew 30%/19% YoY to 14.0mmt/19.5mmt.

* GRM increased YoY to USD5.1/bbl (v/s USD3.1 in 1HFY21), while marketing margin was lower YoY at INR5.9/lit (v/s INR7.8 in 1HFY21).

Valuation and view – Reiterate Buy

* Capex guidance for FY22 stands at INR100b (refining: INR26b, marketing: INR33b, petchem: INR10b, BRPL equity investment: INR13b, and rest in other smaller projects including CGDs) - which is expected to be similar in FY23 as well. The company spent INR66b in 1HFY22, including INR24b for the BORL acquisition. Government receivables stand at INR1.2b.

* A further improvement in the company’s GRMs and marketing margin returning to normalised levels could create the potential for an upside to our call. On the other hand, any delay in the privatisation procedure owing to further lockdowns or delay in the opening up of international borders poses a downside risk to our call. BPCL trades at 1.7x FY23 PBV, and we value the stock at 2.3x Dec’23E P/BV to arrive at our target price of INR605. Reiterate Buy.

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