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Earnings above estimates on lower opex; GRMs healthy

* BPCL reported Q2FY22 standalone EBITDA/APAT of Rs44.8bn/26.9bn, up 36%/79% qoq, flat/down 3% yoy and 21%/45% above our est. Gross profit of Rs95.8bn was inline, but 11% lower than est. opex, higher Other Income and lower interest costs led to the beat.

* Reported GRM stood at USD6.04/bbl in Q2 vs. estimate of USD3.5. Marketing inventory gain of Rs2.3bn implies a blended core marketing margin at Rs6.5/kg (14% miss). GRM beat was offset by marketing margin miss. We believe core GRM should be USD4/bbl+.

* Refinery utilization was healthy at 104% (15% beat), while domestic marketing volume growth was 11% yoy vs. 7% of the industry. Total sales volume was 2% above our estimate. Gross debt fell 3% qoq and 38% yoy to Rs210bn, excluding lease liabilities.

* We build higher GRMs but reduce petchem segment earnings based on management guidance, raising only FY22E EPS by 14%. Adjusting for ex-NRL dividend-exit, we cut Dec’22TP by 5% to Rs510 (6.4x Dec’23E core blended EV/EBITDA). Retain Buy/OW.

Highlights: Other Expenditure rose 24% yoy/3% qoq to Rs43.3bn (10% below est.), while employee cost was down 18%/up 4% to Rs7.69bn (20% below est.). Other Income was up 49% yoy/39% qoq to Rs6.29bn (a 36% beat). Interest costs fell by 19% qoq to Rs3.94bn (26% below est.), while forex gain was Rs513mn. Tax rate came in at 25.1%. Mumbai/Kochi reported GRM of USD6.5/5.6/bbl. Refining volumes rose 5% qoq to 7.2mmt. Exports sales rose by 55% qoq to 0.5mmt. Overall marketing volume growth was 13% yoy. Petrol/diesel sales volume growth of 15%/10% yoy vs. the industry’s 12%/9%. Q2 capex was Rs25.5bn, while the O/S subsidy was Rs1.2bn.

Guidance: The disinvestment process is currently in the query-data response-providing stage. Govt is running the process and its aim is to complete it by FY22-end. Meetings with bidders have not happened yet, but may happen in Q3. BPCL is planning to convert 1,000 ROs into energy stations with EV charging, CNG, LNG, etc. LPG subsidy is marginal now. One unit of Kochi PDPP is having a technical problem, but by Nov-end, it should be sorted. Volumes may reach pre-Covid levels by Q4FY22. BORL merger benefits include one level of crude procurement, hedging and inventory management. CST benefit would be Rs5-6bn positive on P&L. BORL debt was Rs93bn while Q2 PAT was Rs2.1bn. FY22 capex guidance is Rs100bn. BPCL is nearing the 10% EBP target, but 20% has unresolved issues as vehicle universe can only take 10%. EV capex would be Rs500mn (1,000 stations). It is still evolving.

Valuation: We value BPCL on a SOTP basis at 6.4x blended Dec’23E EV/EBITDA, BORL at 5x and investments with a 30% holdco discount. The Mozambique project has been valued at a 30% discount to the latest transaction value. Key risks are adverse petroleum prices/margins/currency, project delays and disinvestment uncertainties.

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