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Bharat Petroleum Corporation’s (BPCL) Q1FY23 standalone EBITDA loss of Rs59.1bn and net loss of Rs62.9bn were the worst in the company’s history and missed our estimates of EBITDA loss of Rs14.7bn and net loss of Rs18.9bn by a wide margin. The miss was due to YoY plunge in marketing earnings offset to a small extent by stronger throughput, robust marketing volumes and record GRMs. Support also came from the inclusion of Bina in standalone earnings from this quarter onward. Marketing volumes at 12.3mt were up 23.4% YoY, ahead of our estimate of 12.1mt. Gross marketing margin (net of inventory loss of Rs3.7bn) turned negative in Q1, at Rs9,974/t. Despite the miss this quarter, we are encouraged by the strength in the company’s refining metrics, robust marketing volumes and relatively stress-free balance sheet. Consolidated earnings are also likely to see the benefit of improved refinery metrics. As a result, while we have factored-in the very weak marketing margins in our revised EPS estimates for FY23E (15% lower than earlier estimate), FY24E EPS still sees an uptick of 5% based on stronger GRMs. We therefore raise the target price to Rs358/sh. Reiterate ADD.

* Refinery margins strong; marketing weak for Q1: Refinery throughput of 9.7mt was the highest quarterly throughput for BPCL helped by inclusion of 2mt share of Bina refinery output. GRM too was at an all-time high of US$27.5/bbl (Mumbai US$23/bbl, Kochi US$27.4/bbl, Bina US$35.1/bbl) for BPCL. However, while marketing volumes at 12.3mt were 23.4% YoY higher, marketing margins remained weak due to: 1) continued freeze on retail fuel price hikes in India, and 2) rising product prices internationally. Blended marketing margin (net of inventory loss of Rs3.7bn) was at (minus) Rs9,974/t, a multi-year low for the company.

* Refining margins have moderated, so have marketing losses! Global recession worries and demand destruction caused by record-high product prices over the last few months have led to a moderation of Singapore GRMs back to US$6.5-7/bbl levels. But this softness has also helped narrow marketing losses to just Rs5-6/ltr for diesel and, in fact, to positive territory of Rs0.76-0.8/ltr for petrol in the last few weeks. We believe GRMs of US$8-9/bbl and marketing margins at Rs1-2/ltr may be a sweet spot for the near term for BPCL. We have accordingly built our estimates for FY24E (GRMs of US$12/bbl overall, 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 reasonably complex refining capacity, a large albeit ‘at risk’ upstream segment and marketing presence. However, the weak marketing earnings and high leverage for BPCL at the consolidated level (1-1.3x over FY22-FY24E) makes us cautious of factoring meaningful upsides from here. Valuations at just 7.2x 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 Rs358/sh. Reiterate ADD.

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

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