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Better than estimated profitability; NRL sale by FY21-end

* BPCL posted better-than-expected profitability driven by better than expected marketing margin. The latter has continued to counterpoise the weaker refining margin for the last couple of quarters now.

* BPCL privatization: Further advice from DIPAM is awaited. The company is ready with its preliminary assessment. While NRL’s divestment is likely to be completed by FY21-end, BPCL is likely to acquire Oman Oil’s stake in BORL soon. The assessment of the EOIs submitted is ongoing.

Beat on earnings…

* BPCL reported inventory gains of INR7.7b (v/s our expectation of INR18b), with marketing/refining gains at INR5b/INR2.7b.

* Reported EBITDA increased 54% YoY to INR43.1b. Adjusted EBITDA (for inventory gains) stood at INR35.3b v/s INR22.6b in 3QFY20.

* Other income was higher due to INR6.1b dividend received from the Numaligarh refinery (NRL). While other expenditure was lower, led by smaller savings in terms of operating expenditure; however, the company doesn’t expect it to continue in future.

* There was a forex gain of INR0.8b. VRS expense during 3Q/9MFY21 stood at INR0.7b/INR7.1b. BPCL recorded a balance ESOP expense of INR4.2b during 3Q (of the total of INR5.4b in 9MFY21) as an exceptional item.

* Reported PAT stood at INR27.8b, while adjusted PAT (for ESOP expense) came in at INR30.6b (v/s INR12.6b in 3QFY20).

…driven by better marketing margin

* Refining gains translates to USD1.3/bbl, resulting in a core GRM of USD1.2/bbl (v/s our expectation of USD2/bbl) for 3QFY21.

* Reported GRM came in below our expectation of USD4.5/bbl at USD2.5/bbl. Marketing margin was better than our estimate of INR5.3/liter at INR6.1/liter. Refining throughput/marketing sales were in line with our estimate of 7.2/11.1mmt (-14%/+1% YoY). Refinery utilization improved to 105% in 3QFY21 with an improvement in product demand.

Valuation and view

* Retail Auto fuel prices in India are currently at record highs. Gross marketing margins are currently at INR3-4/liter v/s INR4.5-5/liter in 3QFY21. The same in FY21YTD averaged INR6.3-6.6/liter, well above its long-term average of ~INR3/liter. The management reiterated that marketing margin and GRM over the longer term trends to be at normalized levels only.

* It remains to be seen whether the government interferes with the high retail Auto fuel prices as such a step would impact privatization of BPCL.

* We value BPCL at 1.7x (20% discount to its FY15-18 average when the market did not see any interference from the government) FY23E P/BV to arrive at our TP of INR419. We maintain Neutral on the stock.

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