Core GRM at a premium to benchmark
* BPCL reported a GRM of USD2.8/bbl, lower than our estimate of USD3.0 and USD7.5 in 1QFY19. Consequently, EBITDA was down 53% YoY/QoQ at INR21.5b, despite a decline of INR1.6b in other expenses.
* Adj. EBITDA was up 37% YoY at INR26.0b, with the refining inventory loss at INR1.3b and the marketing inventory loss at INR3.3b.
* Forex gain was at INR0.3b for the quarter (v/s a loss of INR7.1b in 1QFY19 and a gain of INR2.8b in 4QFY19). Reported PAT was at INR10.8b (-53% YoY).
* BPCL has reported first-quarter earnings based on Ind-AS 116. Depreciation expense increased by 24% YoY and interest cost by 50% YoY. PBT came in at INR13.5b (and at INR14.0b adjusting for Ind-AS impact of INR0.5b).
* Refining: Refining throughput declined by 4% YoY to 7.5mmt, led by shutdown at the Mumbai refinery
* Core GRM was at USD3.7/bbl (v/s USD4.2 in 1QFY19 and USD2.6 in 4QFY19).
* GRM at the Mumbai refinery stood at USD3.5/bbl (throughput at 3.1mmt) and Kochi at USD2.3/bbl (throughput at 4.4mmt).
* Kochi refinery saw throughput of 4.4mmt (+11% YoY), in line with expected stabilization.
* Marketing: Marketing volumes (excl. exports) stood in line with our estimate at 11.1mmt (flat YoY).
* Marketing GRM including inventory stood at INR4.4/liter (v/s INR4.9 in 1QFY19 and INR6.5 in 4QFY19).
* BPCL incurred capex of INR17.6b in 1QFY20 (FY20 capex guided at INR80b).
* It plans to commission ~6,000 retail outlets over the next three years, with focus areas in rural India and highways.
* Numaligarh refinery expansion (from current 3mmtpa) to 9mmtpa is approved and the ground work will start from 4QFY20. Total estimated capex is ~INR220-240b, with expected completion in next four years. The expansion is a strategic plan to capture value of the tax benefit and increasing demand in north-east part of India.
* After almost a delay of 4-5 years, the final investment decision at Mozambique was completed in Jun’19. It is expected to come online from FY24-25, with total net capex of USD2.5b spread over the same period.
* BPCL also plans to deploy capex of ~INR50b over the next five years for developing its CGD business.
Valuation and view
* Stable crude oil and exchange rate may drive structural changes in pricing of LPG and kerosene, bidding farewell to all under-recoveries.
* Factoring in the performance of 1QFY20 and the marginal impact of Ind-AS 116, we revise down our EPS estimate by ~16%/12% for FY20/21.
* BPCL is trading at 9.1x FY20E consol. EPS of INR37.7 and 7.5x FY20E EV/EBTIDA. We value BPCL at 1.9x FY21E PBV multiple. We reiterate our Buy rating with a target price of INR465.
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