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LPG compensation and strong GRM drive earnings beat

BPCL’s 2QFY23 standalone EBITDA was better than expected at positive INR 14.3bn vs. JMFe/consensus of negative INR 75bn/ INR 70bn due to a) government compensation of INR 55.8bn for LPG underrecoveries; hence, marketing loss was lower at ~INR 57bn vs. JMFe of loss of INR 99bn; and b) reported GRM before cess being significantly higher at USD 16.8/bbl vs. JMFe of USD 7.1bbl resulting in refining implied EBITDA being higher at INR 71bn (vs. JMFe of INR 22 bn). However, gross standalone debt QoQ was INR 482.4bn at end-2QFY23 (vs. 322.8bn at end-1QFY23) given continued loss on auto-fuel and ongoing capex. At CMP, BPCL is trading at ~1.0x FY24 P/B (vs. 10-year average of 1.5x). Hence, despite huge risk to marketing segment earnings on account of sustained high crude price, we maintain BUY on BPCL with an unchanged TP of INR 385.

* Reported GRM at USD16.8/bbl, significantly higher than JMFe of USD 7.1/bbl: BPCL’s 2QFY23standalone EBITDA was better than expected at positive INR 14.3bn vs. JMFe/consensus of negative INR 75bn/ INR 70bn due to a) government compensation of INR 55.8bn for LPG underrecoveries for FY22 and 1HFY23; and b) reported GRM before cess being significantly higher at USD 16.8/bbl vs. JMFe of USD 7.1bbl. As expected, forex loss was high at INR 5.9bn in 2QFY23 (vs. INR 9.6bn in 1QFY23). Reported PAT was also better than expected at negative INR 3.0bn (vs. JMFe/consensus of negative INR 69bn/ negative INR 62bn). However, gross standalone debt (excluding lease liability) jumped QoQ to INR 482.4bn at end-2QFY23 (vs. 322.8bn at end-1QFY23) given continued loss on auto-fuel and ongoing capex; however, debt seems to be before adjustment of LPG compensation as cash is yet to be received. The refining segment implied EBITDA was higher at INR 71bn (vs. JMFe of INR 22 bn) as reported GRM (before cess) in 2QFY23 was USD 16.8/bbl (vs. JMFe of USD 7.1/bbl and IOCL, HPCL, CPCL and MRPL’s reported 2QFY23 GRM of USD 18.44/bbl, USD 8.4/bbl, USD 4.44/bbl and negative USD 4.5/bbl, respectively – difference in GRM of various refiners could be partly due to treatment of export cess). Throughput was slightly lower at 8.8mmt (vs. 9.7mmt in 1QFY23).

* Marketing losses lower at INR 57bn due to compensation of INR 55.8bn for LPG under-recoveries: Our calculations suggest BPCL is likely to have incurred a loss of INR 57bn in the marketing segment (including likely inventory loss of INR 3.8bn) vs. JMFe of loss of INR 99bn (vs. loss of INR 31bn for HPCL and INR 120bn of IOCL in 2QFY23) due to government compensation of INR 55.8bn for LPG under-recoveries for FY22 and 1HFY23. This implies normalised marketing EBITDA of negative INR 4.5k/tn (vs. JMFe of negative INR 7k/tn and negative INR 2.2k/tn for HPCL, negative INR 5k/tn for IOCL in 2QFY23). Marketing sales volume was a tad lower at 11.7mmt. BPCL’s implied market share has risen in 2QFY23 to 27.5% in MS (vs. 27.2% in 1QFY23) and 26.9% in HSD (vs. 25.6% in 1QFY23).

* Marketing pain continues; however, maintain BUY on valuation grounds: At CMP, BPCL is trading at ~1.0x FY24 P/B (vs. 10-year average of 1.5x). Hence, despite huge risk to marketing segment earnings on account of sustained high crude price, we maintain BUY on BPCL with an unchanged TP of INR 385. Key risks: a) sustained high marketing losses; b) decline in GRM below historical levels.

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