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Buy Bharat Petroleum Ltd For Target Rs. 495

* Q3FY21 standalone EBITDA/PAT stood at Rs43.8bn/Rs27.8bn, down 2%/up 24% qoq and 9%/25% above our estimates, driven by 3% gross profit beat and lower-than-expected staff costs. Other Income f Rs14.4bn was 77% above estimates (up ~3x yoy/qoq).

* BPCL’s reported GRM stood at USD2.5/bbl in Q3 (vs. our estimate of USD2.2), with inventory gains of Rs5.0bn. Core GRM came in at USD1.2/bbl, in-line. Refinery utilization was 105% (at 7.24mmt). Kochi/Mumbai core GRM was at USD1.1/USD1.4 per bbl.

* Marketing inventory gain came in at Rs2.7bn, with blended margin of Rs6.8/kg, up 7% qoq and a 4% beat. Domestic/total sales volume grew 1%/fell 8% yoy to 11.4mmt. Gross debt (incl. IndAS116 liab.) fell 9% qoq to Rs309bn. Core EPS was Rs14.5, 32% above our est.

* We raise FY21E EPS by 22% based on a 9M run rate but slightly cut FY22/23E EPS by 3%/1% aligning margin assumptions. We roll over the valuation to Mar’23E, with a TP of Rs495 (1% revision). Maintain a Buy rating with OW stance in EAP.

Highlights:

Interest expense jumped from Rs126mn to Rs2.5bn qoq (as Q2 had forex gains), while forex gain of Rs756mn was lower. Rs4.2bn/Rs0.7bn was on account of ESPS/VRS expense, lower than our estimate of Rs7bn combined. ETR remained at the earlier level of 33.2%. Domestic sales volume grew 1% yoy, (vs. decline of 1%/3% for industry/IOCL; 3% growth for HPCL), while total volumes fell 8% to 11.4mmt as exports dropped sharply yoy (down 11% qoq). Petrol/diesel volumes rose 6.6%/0.4% yoy. 9MFY21 capex stood at Rs56.9bn. Share of profits from associates/JVs was negative at Rs7.3bn in Q3 vs. negative Rs821mn/positive Rs435mn in Q2FY21/Q3FY20. The board declared an interim dividend of Rs16/sh. BORL GRM was USD2.14/bbl with a net loss of Rs2.1bn, while NRL GRM was USD37/bbl and a PAT of Rs8.3bn. NRL dividend of Rs6.1bn was part of Other Income.

Guidance:

The board has approved the NRL stake sale and purchase agreement and OILEIL has been intimated; BPCL expects to close the sale by FY21. BPCL’s own data room is ready and awaiting DIPAM advice. Highways saw strong volume growth, but public transport, schools, tourism, etc. were still down. 60% of BPCL’s ATF customers are international where routes have not opened. In Q2-Q3FY21, marketing margins were at sustainable levels and BPCL expects to maintain it. New Mumbai refinery jetty would enable suezmax vessels entailing freight savings. BPCL has no intention like RIL of being a sole petchem player but aims petchem share to reach 10%. It raised FY21 capex to Rs90bn (from Rs80bn). Govt subsidy O/S is down at Rs22bn. It expects two PDPP units by Mar’21 and remaining one by May’21. BORL’s Oman Oil stake acquisition discussion has reached a stage of conclusion.

Valuation:

We value BPCL on a SOTP basis at 6.5x blended Mar’23E EV/EBITDA, BORLNRL at 5-6x and investments at a 30-40% hodco discount. Key risks are adverse petroleum prices/margins/currency, project delays and disinvestment uncertainties.

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