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Upping our faith in privatization

* BPCL posted better-than-estimated profitability, driven by better marketing volumes and refining/marketing margin, further aided by inventory gains.

* The company made huge progress towards privatization in FY21, despite challenges posed by COVID-19, by streamlining its subsidiaries (divested its entire stake in NRL, consolidated its stake in BORL, merged BGRL with BPCL) and sold off its trust shares.

* In our Feb’21 report, titled ‘BPCL: Moves closer to divestment, upgrade to Buy’, we presented our optimism on the privatization process, with just two challenges, which were answered in its 4QFY21 result:

  Impairment of upstream assets – BPRL by INR20.3b, thus the carrying value now stands at INR62.8b.

  It further rationalized its employee count by 19% YoY to ~9,100 in FY21.

* The management reiterated that it has no intention of divesting its stakes in IGL and PLNG. It is working with the government to avoid an open offer in these subsidiaries.

* A virtual data room has been open since 10th Apr’21. After this study, the next two steps are discussion with senior management and check on physical assets. Though the latter is possible only with the opening up of international travel, our faith in the privatization of BPCL has gone up a notch post its 4QFY21 result. We value BPCL at 2.3x FY23E P/BV and reiterate our Buy rating with a TP of INR570/share.

Developments on BPCL privatization in FY21

* Completed sale of its entire stake in NRL to a consortium of Oil India and Engineers India, and to the Government of Assam for INR98.8b.

* Acquired 36.62% stake in BORL for INR24b, resulting in a total consideration of INR65.5b (transaction to be completed in 1QFY22).

* It sold equity shares from ‘BPCL Trust for investment in shares’ via a bulk deal on the stock exchange for INR55.1b (now ~1.52% shares remain).

* Proposed merger of BGRL with BPCL to be completed after obtaining approval from the respective authorities.

4QFY21: Beat led by better marketing volume and margin

* Marketing margin stood at INR6/liter (est. INR4). Marketing sales volumes were 7% higher than our estimate at 11.2mmt (+4% YoY).

* Core GRM stood at USD2.46/bbl (est. USD1.5/bbl). Reported GRM came in at USD6.6/bbl (est. USD4.5). Refining throughput was in line at 8.4mmt.

* BPCL reported inventory gains of INR36.4b (refining/marketing gains of INR18.1b/INR18.3b). Adjusted EBITDA for inventory gains stood at INR14.2b. Reported EBITDA came in at INR50.6b (v/s INR5.9b in 4QFY20).

* Expense of INR6.5b was recognized as a reduction in the carrying value of the PMUY loan in other expenditure. Employee expense was higher, as INR0.7b (INR7.8b for FY21) was charged as VRS expense.

* It opted to move to the new tax regime and recognized DTL of INR18.2b, thus the tax rate stood at 2.4% in 4QFY21. Reported PAT came in at INR119.4b, while adjusted PAT (for exceptional items) stood at INR51.2b.

* The company reported exceptional gains of INR69.9b on account of:

 Gain on sale of (61.65%) investment in NRL at INR94.2b.

 Impairment of BPRL by INR20.3b (carrying value now at INR62.8b).

 Employee share expense stood at INR4b (INR9.4b in FY21).

FY21 aided by huge inventory gains (INR74.3b)

* EBITDA/PBT stood at INR172b/INR226b (v/s INR83b/INR27b in FY20). Reported/adjusted PAT stood at INR190b/INR126b (v/s INR27b/INR34b in FY20).

* Refining throughput/marketing sales fell 17%/10% YoY to 26.4mmt/38.7mmt. HSD/MS/ATF volumes declined by 11%/8%/40% YoY, while LPG was up 6% YoY.

* Marketing margin averaged INR6.9/liter (up from INR4.7 in FY20). The company added 762/2,044 outlets in 4Q/FY21, totaling 18,657.

* Core GRM averaged USD1.8/bbl (v/s USD4.3 in FY20). Reported GRM stood at USD4.06/bbl (v/s USD2.5 in FY20).

Valuation and view – Buy

* Capex for FY21 stood at INR111b and guidance for FY22 is INR120b (refining: INR30b, marketing: INR40b, petchem: INR10b, BRPL equity investment: INR13b, and the rest in other smaller projects including CGDs).

* Government receivables stands at a mere INR3b (down from INR40b/INR62b in 3QFY21/FY20). Standalone/consolidated debt decreased 44%/28% YoY at INR213b/INR400b. It announced a final dividend of INR58/share (in addition to INR21 announced before), totaling INR79 (~17% dividend yield in FY21).

* BPCL stated that 1QFY22 will be impacted by the second COVID wave – with refining throughput down to 86% at present (v/s 112% in 4QFY21). Since demand for its products has fallen by a similar amount, we revise down our FY22E consolidated EBITDA by 12%. The impact on FY22E EPS is ~9% as the company moved to the lower tax rate of 25.17%.

* Upside risk to our call is further improvement in GRMs, with the opening up of global economies and marketing margin above normalized levels (of INR3/liter). Downside risk to our call is a deferral in the privatization process owing to further lockdowns/delay in opening up of international borders.

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