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Add Bharat Petroleum Corporation Ltd For Target Rs.535

Covid‐ 2nd wave weighs on business & earnings

Result Highlights: ‐Below estimates

* 1QFY22 Profitability:  

The Ebitda and PAT for the quarter stood at Rs 32.6bn (‐ 17% YoY;  ‐36% QoQ) and Rs 15bn (‐28% YoY;  ‐87% QoQ). The reported PAT carries a net impact of Rs 771 as exceptional item towards expense related to employee stock option scheme. The sequential decline in profitability stemmed from Covid‐2nd wave derailing the recovery in domestic petroleum consumption.

* Refinery Utilization:

The refining throughput stood QoQ weaker at 6.8mmt(4Q: 8.4mmt), as refineries optimised throughput in wake of weak domestic demand. Both Mumbai and Kochi refinery reported drop in refinery throughput & utilization to  3.4mmt & 115% (from 4mmt & 133% in 4Q) and 3.4mmt & 91% (from 4.4mmt & 118% in 4Q), repectively  

* Gross Refinery Margin:

The GRM also stood QoQ weaker at USD 4.1/bbl  with Mumbai refinery reporting a GRM of USD 4.4/bbl & Kochi a GRM of  USD 3.9/bbl.  

* Marketing sales:

Total Domestic  products sales stood at 9.6mmt  (+28% YoY; ‐ 14% QoQ), vs industry growth of 19% YoY during the quarter. MS sales reported a growth of 40% YoY (industry: 35% YoY) and HSD sales growth of 27% YoY (industry: 22% YoY). The MS and HSD sales however declined by 10% and 15% QoQ, respectively, with likelihood of marginal loss of market share on sequential basis.

* Marketing margins:

As per our assessment, the marketing margin during the quarter stood at Rs 5741/t (4Q: Rs 5097/t), primarily on healthy HSD spreads, even as  MS margins were muted. The marketing inventory gain stood to the order of Rs 8bn (4QFY21: gain of Rs 18.3bn)

View & Valuation

The 1QFY22 earnings at operating level, stood below stood below our (YES: Rs 46bn) but in‐line with street estimates. The miss on our estimates stemmed primarily from a) lower than estimated marketing inventory gain; b) lower than estimated refining throughput & GRM and c) tad weaker than estimated domestic fuel sales.  

While 1QFY22, was relatively disappointing on account of impact of Covid‐2nd wave, we expect earnings prospects for BPCL to improve going ahead as a) Refinery utilization and Domestic fuel sales normalizes, b) full commissioning of partially commissioned Propylene Derivative Petrochemical Project (PDPP)  at Kochi adds to operating profits and c) improvement in in MS marketing margins observed over Jul’21 (vs 1QFY21), along with firm HSD margins, adds to gross marketing margins.  

In addition, with impending privatization in perspective, we maintain our ADD rating on BPCL with a Mar’23 target price of Rs 535/sh

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