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A bad quarter, but FY24E can bring better tidings

Bharat Petroleum Corporation’s (BPCL) Q2FY23 standalone recurring EBITDA loss of Rs41.5bn and net loss of Rs58.8bn beat our estimates of EBITDA loss of Rs50.9bn and net loss of Rs68.7bn. Higher than estimated GRMs (albeit down sharply QoQ) and lower inventory loss vs our estimates drove the beat, with reported earnings rescued to an extent by a onetime receipt of Rs55.8bn in LPG dues from the government. Marketing volumes at 11.7mt were down 5% QoQ, below our estimate of 11.85mt. Gross marketing margin (net of inventory loss of ~Rs3.8bn) remained negative in Q2 (as in Q1) at (minus) Rs5,112/t – though this was considerably improved from the (negative) Rs9,974/t seen in Q1. We do believe that a relatively stress-free balance sheet and a complex refining portfolio along with a significant upstream presence (albeit delayed due to political issues at Mozambique) are BPCL’s strengths, but nearterm prospects remain muted. We have cut FY23E EPS by 15.9% to factor-in the lower margins, but reduce our estimate of net debt and increase the value of listed investments. This leads to 5.3% increase in FY24E EPS and EV/EBITDA based target price to Rs335/sh (earlier: Rs313/sh). Reiterate ADD.

* Refinery margins dipped QoQ; marketing margins remain very weak: Refinery throughput of 8.8mt was up by a strong 23% YoY, helped by inclusion of 1.7mt share of Bina refinery output. GRMs at US$16.8/bbl (Mumbai US$10.9/bbl, Kochi US$18.4/bbl, Bina US$24.5/bbl) for BPCL contracted by US$10.7/bbl QoQ. This was due to a US$12.5/bbl decline in benchmark GRMs (above our estimates of US$14.3/bbl). However, while marketing volumes at 11.7mt were flat YoY, marketing margins remained weak as a result of: 1) continued freeze on retail fuel price hikes in India, and 2) rising product prices internationally. Blended marketing margin (net of estimated inventory loss of Rs3.8bn) was at (minus) Rs5,112/t (Q2FY22 margin was positive at Rs5,740/t).

* Refining margins have moderated, so have marketing losses! Global recession worries and demand destruction caused by record-high product prices over the past few months led to a moderation in Singapore GRMs back to US$4.0/bbl levels. However, even as loss on diesel remains high at Rs13/ltr, petrol retail margins have turned positive to as much as Rs7/ltr in recent weeks. We believe GRMs of US$8-9/bbl and marketing margins at Rs1-2/ltr may be a sweet spot in the near term for BPCL. We have accordingly built our estimates for FY24E as follows: overall GRMs of US$10.9/bbl, and marketing margins of just Rs0.5-0.6/ltr for both petrol and diesel.

* Reiterate ADD: BPCL remains a well-balanced downstream energy play with a reasonably complex refining capacity, a large albeit ‘at risk’ upstream segment and significant marketing presence. However, the weak marketing earnings and high leverage at the consolidated level (leverage of 1.2x-1.3x over FY22-FY24E) makes us cautious about assuming meaningful upsides from here. Valuations at just 6.6x FY24E P/E and ~7.1x FY24E EV/EBITDA offer balanced risk-reward at current levels. Our EV/EBITDA-based valuation delivers a target price of Rs335/sh. Reiterate ADD.

* Key downside risks: No recovery in marketing losses even by H2FY23, unexpected softness in refining margins, and slowdown in fuel consumption in India.

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