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Privatisation bid and GRM key to outlook

We resume our coverage on BPCL with BUY rating and target price of Rs544/share (27% upside). Our target price of Rs544 assumes successful bid price in privatisation of Rs609/share (8x FY22E EV/EBITDA) on 56% of investors’ holding and Rs462/share (6x FY22E EV/EBITDA) on balance. We estimate FY22E core GRM recovering to US$3.5/bbl from US$1.5/bbl in 9MFY21, but net marketing margin fall to Rs2.5/l from Rs3.07/l in FY21E. We expect global demand recovery and refinery closures to drive GRM recovery. Net marketing margin is Rs0.09/l now, but we are hopeful of price hikes/excise cut boosting net margin to Rs2.5/l.

* Raise FY21-FY22E EPS and target price: We have raised our FY21E EPS (up 250% YoY) by 61% due to: 1) Factoring product inventory gain of Rs47.6bn (Rs24.2bn in 9M and Rs23.4bn in Q4E) vs nil earlier; 2) upgrade in net auto fuel marketing margin to Rs3.07/l from Rs2.5/l earlier; and 3) cut in interest cost by 55% to factor in the steep fall in 9M. We have also raised our FY22E EPS estimate by 14% due to 1) upgrade in net marketing margin to Rs2.5/l vs Rs2.25/l earlier and 2) cut in interest cost by 46% as NRL stake sale and treasury shares sale reduce debt. FY22E EPS including inventory gain would be down 24% YoY, but that excluding would be up 34% YoY. Our target price of Rs544 (up 27%) assumes 56% of holding realises Rs609 (8x FY22E EV/EBITDA vs FY21E earlier) in successful bidder’s open offer and Rs462 (6x FY22E EV/EBITDA) is realised on balance. FV will be higher at Rs628 if successful bid price is Rs759 (EV based on Essar Oil deal).

* Singapore GRM at 6-quarter high but not out of the woods; demand recovery & refinery closures key to recovery: Reuters’ Singapore GRM, which touched a low of minus US$0.9/bbl in Q1FY21, has recovered to 6-quarter high of US$1.9/bbl in Q4FY21-TD. Recovery in global oil demand from lows and snowstorms that led to plunge in US refinery utilisation to 56-76% from 83% and product inventories have boosted GRM. Petrol cracks are at 5-quarter high but diesel cracks are well below pre-covid levels. Second wave of covid reversed demand recovery especially in Europe and jet fuel demand is still sharply below pre-covid levels. However, we are optimistic that further demand recovery driven by vaccine rollout and global refinery closures (1.5m b/d to be shut and another 1.4m b/d may shut) will boost global refinery utilisation from 38-year low of 72.4% to 77.4% in CY21E and drive up GRM.

* Marketing margin at record high in FY21E; price hikes/excise to drive rise from current lows: Net auto fuel marketing margin is at Rs3.19/l in FY21-TD but very low at Rs0.09/l on 18-Mar’21 and minus Rs0.16/l on 1-Apr’21E. We expect price hikes and/or excise cuts that are not passed on to ensure net margin at ~Rs2.5/l in FY22E. Our optimism is due to: 1) Healthy auto fuel marketing margin being crucial to success of BPCL’s privatisation; 2) FY22E budget excise estimate leaves room to cut excise duty by Rs8.5/l and 3) this government’s track record. Net marketing margin was Rs0.96-1.07/l in first four years of this government’s tenure (FY15-FY18) and Rs1.83-2.22/l in FY19-FY20. Price hikes were made to keep net margins at a reasonable level even when oil surged to US$86/bbl and INR weakened to Rs75 in Oct’18, seven months before 2019 elections.

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