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BPCL reported a strong Q1FY24 with EBITDA of INR 149.6bn and recurring PAT of INR 99.2bn, up 34%/32% QoQ respectively, and materially ahead of the operating loss of Rs59bn and net loss of INR 62.9bn in Q1FY23 (I-Sec: EBITDA INR 107bn, PAT INR 66.3bn). The strong performance was driven by marketing (6.6% volume growth, blended margins up 2.3x QoQ) while refining performance, though lower YoY/QoQ, was still at a robust USD 12.6/bbl, well above longterm averages. Going forward, we do expect normalisation of marketing margins and softer GRMs over the rest of FY24E. However, even at conservative assumptions for both segments, FY24E earnings are set to beat current street estimates by 17%-27%. We revise FY24E/25E EPS by 15.5%/22.9% respectively and raise the target price to INR 540/sh. Maintain BUY.

Operating margins boosted by strong marketing performance

Refinery throughput of 10.4mt was up 7% YoY, helped by revival of both Mumbai and Kochi volumes during the quarter. GRMs of USD 12.6/bbl were down sharply by USD 14.9/bbl YoY and USD 7.9/bbl QoQ, but still beat our estimate of USD 9.1/bbl. At the same time, blended marketing margin of INR 10,822/t improved 2.3x QoQ and well above the negative margin of INR 9,974/t in Q1FY23, helped by retail margin of INR 8.8/ltr, among the highestever reported by BPCL. While GRMs have recovered in Q2FY24-TD and we expect average GRMs to stay near double digits over the rest of FY24E, marketing margin should normalise sharply in H2, as we do expect a price cut of INR 5-6/ltr in the latter half of the year. Given the strength in retail margin and the management guidance, which rules out any immediate price cut, we now factor-in a stronger retail margin of ~INR 4/ltr for FY24E.

FY24E to see further upgrades from the street

Our sense is that the street continues to underestimate the FY24 earnings momentum for the OMCs. Even factoring-in a materially lower marketing margin trend for H2 (we assume a nominal INR 1/ltr retail margin for H2 vs an estimated INR 7.5/ltr for H1) and a moderate USD 7-8/bbl GRMs for the rest of FY24E (current run-rate: USD 8/bbl), our revised EPS estimates for FY24E/FY25E are a significant 15.5%/22.9% higher vs previous estimates. Upside risk exists to these estimates if the current margin trends for refining and marketing sustain beyond Sep’23.

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