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Strong GRM drives earnings beat

Like the trend seen in other OMCs, BPCL’s 4QFY23 standalone EBITDA was significantly higher at INR 112bn vs. JMFe/consensus of INR 77bn/ INR 76bn due to reported GRM being significantly higher at USD 20.6/bbl vs. JMFe of USD 12.6/bbl; hence, refining segment implied EBITDA was higher at INR 113bn in 4QFY23 (vs. JMFe of INR 59bn). Our calculations suggest marketing EBITDA was negative INR 1.5bn (including marketing inventory loss of INR 19bn) vs. JMFe of positive INR 18bn. However, there was an impairment of INR 13.6 bn on account of delay in development of its Mozambique gas asset. Reported PAT was still higher at INR 65bn (vs. JMFe/consensus of INR 47bn/ INR 49bn). The board approved a dividend of INR 4/share or 40% payout (vs. dividend of INR 16/share paid in FY22, implying 39% payout). Debt declined by INR 44bn QoQ to INR 359bn at end-4QFY23. We maintain BUY (revised TP of INR 415) on valuations (trading at 1.1x FY25 P/B) and as OMCs’ integrated margin has improved with lower crude price and normalisation of product cracks.

* Earnings beat driven by strong reported GRM of USD 20.6/bbl despite impairment of E&P asset:

BPCL’s 4QFY23 standalone EBITDA was significantly higher at INR 112bn vs. JMFe/consensus of INR 77bn/ INR 76bn due to reported GRM being significantly higher at USD 20.6/bbl vs. JMFe of USD 12.6/bbl. However, there was an impairment of INR 13.6bn on account of its Mozambique gas asset due to stoppage of work since Apr’21 because of security concerns. Reported PAT was still significantly higher at INR 65bn (vs. JMFe/consensus of INR 47bn/ INR 49bn). BPCL’s FY23 consolidated PAT was positive INR 21.3bn (vs. positive INR 98bn for IOCL and net loss of INR 70bn for HPCL). The refining segment implied EBITDA was higher at INR 113bn in 4QFY23 (vs. JMFe of INR 59bn) due to strong reported GRM of USD 20.6 /bbl – however, this is in line with the GRM beat reported by other refiners as well due to the sharp jump in usage of cheaper Russian crude (in 4QFY23, RIL’s implied GRM was ~USD 13/bbl, while IOCL, HPCL, CPCL and MRPL’s reported GRM was USD 15.3/bbl USD 14.0/bbl, USD 12.5/bbl and USD 15.1/bbl, respectively). Throughput was also slightly higher at 10.6mmt (vs. 9.4mmt in 3QFY23).

* Implied marketing EBITDA at negative INR 1.5bn due to INR 19bn inventory loss:

Our calculations suggest marketing EBITDA was at negative INR 1.5bn (including marketing inventory loss of INR 19bn) vs. JMFe of positive INR 18bn. This implies normalised marketing EBITDA of INR 1,334k/tn (vs. JMFe of INR 2,000/tn and vs. INR 1,746/tn for HPCL and INR 290/tn for IOCL in 4QFY23). Marketing sales volume was largely in line at 13.25mmt. Implied integrated reported EBITDA margin was at INR 4,671/tn in 4QFY23 (vs. INR 1,889/tn in 3QFY23).

* Maintain BUY as OMCs’ integrated margin improves with lower crude price and normalisation of product cracks:

We raise our FY24 EBITDA by 30%, factoring in gross auto-fuel marketing margin of INR 4.5/ltr (vs. normal INR 3.5/ltr) assuming the government continues to allow OMCs to earn higher margin to recoup their FY23 losses taking advantage of lower crude price; our FY25 EBITDA has increased by 7%, assuming normalised refining and marketing margin. Hence, our TP has been revised to INR 415 (from INR 390) factoring in normalisation of working capital. At CMP, BPCL is trading at ~1.1x FY25 P/B (vs. 10-year average of 1.5x). We maintain BUY as OMCs’ integrated margin has improved with lower crude price and normalisation of product cracks. However, BPCL’s earnings will continue to be contingent on volatility in crude price/product cracks and further risk to OMCs’ marketing pricing freedom.

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