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* Strong marketing profitability make up for weak refining
* Easing political uncertainty post Central elections and benign crude oil prices from rising US supplies are likely to support stable earnings growth for the OMCs.
We maintain our FY20/21E earnings. During Q4, core performance for BPCL improved led by better marketing performance. Benign crude price outlook given rising US supplies and weak global macros is likely to keep marketing margins buoyant. Oil prices likely to remain benign, as rising US supplies cushions the impact of supply disruptions of over 3mbpd. Weak global macros and US-China trade dispute will prevent crude prices flare-up. Also, completion of Central elections will ease policy overhang. Maintain BUY
Operationally strong results:
BPCL reported strong Q4FY19 results with EBITDA of Rs48bn (PLe Rs53.7bn; +29%YoY) and PAT of Rs31.2bn (PLe Rs33.6bn; +17%YoY) led by higher than expected marketing earnings and lower other expense given forex gains. For Q4, total inventory gains were at Rs3.6bn (PLe Rs28.7bn). Foreign exchange gains for Q4 were at Rs2.7bn. The core EBIDTA for the quarter, adjusted for forex and inventory gains were at Rs41.7bn (Rs34.1bn in Q3). For FY19, core standalone EBIDTA were at Rs114bn vs Rs102bn in FY18. Adjusted marketing profitability improved sequentially: BPCL’s adjusted marketing EBIDTA was at Rs38.6bn (Rs31.0bn in Q3) when state elections led to lower margins. BPCL’s marketing volumes lagged industry run rate for HSD (1.4% YoY vs 4.0% for industry), and MS (8.0% YoY against industry rate of 9.0%YoY) respectively.
Weak refining margins:
BPCL’s refining margins for Q4FY19 came in at US$2.74/bbl (Q3FY19 at US$2.78bbl) and included inventory gains of US$0.2/bbl. Refining margins were impacted due to weak heavy-sweet crude spreads. For FY19, refining margins were at US$4.58/bbl vs US$6.85/bbl due to weak gasoline spreads. Adjusted GRMs for FY19 were at US$4.02/bbl vs US$5.99/bbl in FY18.
Global GRM’s are likely to remain under pressure, as new refining capacity addition of ~ 2mbpd is higher than demand expectation of 1.1mbpd. However, OMCs with ~40% diesel product slate remain well placed to benefit from IMO2020 regulation which will increase diesel demand by >1mbpd if they are implemented immediately. For Q4, refining throughput was at record 8.21MTPA (7.49MTPA in Q3). For FY19, refining throughput was at 31.01MTPA vs 28.54MTPA in FY18.
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