01-01-1970 12:00 AM | Source: Emkay Global Financial Services Ltd
Hold Bharat Petroleum Corporation Ltd For Target Rs.375- Emkay Global Financial Services Ltd
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Marketing losses underline weak earnings; GRMs better on Bina, downgrade to Hold

* BPCL reported Q1FY23 standalone EBITDA loss/net loss of Rs49.4bn/Rs62.9bn (including BORL, hence, not comparable). Reported GRM was USD27.5/bbl, while Mumbai-Kochi was USD25.5 (vs. USD23 estimate). BORL/Bina GRM was USD35.1/bbl.

* Domestic sales volume growth of 22% yoy was above industry. Marketing inventory loss was Rs3.7bn (vs. Rs14bn est.), with blended margin at negative Rs9.8/kg (vs. -Rs7.6/kg est.). Gross debt (ex-lease liability) was Rs322.8bn with Bina debt estimated at ~Rs100bn.

* BPCL’s FY23 earnings visibility is low as Q1 was still supported by Bina GRMs (marketing being weak). There would be material impact from factors like crude oil, auto fuel and LPG pricing trends, and GRM outlook. Hence, we have cut FY23E PAT by 56% to Rs33bn. .

* We largely retain FY24/25E (ex-Bina) EBITDA, though cutting EPS by 5%/7% on higher interest cost. We have cut our rolled-over Sept’23E TP by 10% to Rs375, as we trim EBITDA multiple from 5.4x to 5.0x. We downgrade to Hold. RSP hikes/lower oil are key triggers.

* Highlights: BPCL’s gross profit of Rs29bn in Q1FY23 was better than our estimate of Rs2bn due to BORL/Bina refinery inclusion. However marketing margins were suppressed. Forex loss was Rs9.6bn. Petrol/diesel sales volume growth of 37%/28% yoy was better than industry numbers. Capex, as per PPAC data, was Rs43.1bn. Core EPS as per our estimate was negative Rs28.1/share.

* Outlook: BPCL’s sizeable Q1 losses distort FY23 earnings outlook at substantially lower level. We have still tweaked our assumptions, building PAT of Rs33bn, but key factors such as oil price movement, resumption of auto fuels and LPG RSP hikes, and potential subsidy support would determine end result, all of which are difficult to ascertain as of now. Our Brent assumption for FY23 is USD100/bbl+, though recession-related downside risks are there. However, this also means another quarter of inventory losses for OMCs. A resilient oil price, however, would require OMCs to quickly resort to price hikes in auto fuels-LPG and recover YTD losses. Amid higher GRMs and diesel cracks, addition of BORL to standalone numbers is accretive for BPCL. We have however not assume

* Valuation: We value BPCL on an SOTP basis, with investments at a 30% holdco discount. We have lowered our target multiple due to low earnings visibility, while rolling it over to Sep’24. We downgrade BPCL from Buy to Hold with eyes on macros and potential policy support. In Q1, however, it fared better than HPCL though with some BV erosion, but IOCL was still a much better performer. Resumption of upstream projects with positive outcome is also a trigger. Key risks: Adverse commodity/currency/polices and project issues.

 

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