Buy Bharat Petroleum Corporation Ltd For Target Rs.525 - Emkay Global
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Healthy core earnings; play on disinvestment
* Q4FY21 standalone adj. EBITDA/PAT rose 17%/28% qoq to Rs51.3bn/Rs39.8bn, above our estimates due to the margin beat. Exceptional items of Rs69.9bn included Rs94.2bn from NRL sale, Rs20.3bn of BPRL impairment and Rs4.0bn of ESPS expenses.
* BPCL’s reported GRM stood at USD6.6/bbl in Q4 (USD4.0 est.), with inventory gains of Rs18.1bn. Core GRM came in at USD2.5/bbl, (USD1.5 est.). Marketing inventory gain of Rs18.3bn implied blended margin down 24% qoq to Rs5.1/kg (5% beat).
* Gross debt rose 11% qoq to Rs342bn. Core EPS was healthy at Rs5.9 (Rs2.1 est). A final dividend of Rs58/sh was recommended with Rs35/sh as a special dividend due to NRL. Dataroom is currently accessible to bidders and Q&A with management will soon start.
* We cut FY22E/23E EPS by 7%/2% as we assume lower marketing margin, partially offset by higher Kochi GRMs due to PDPP-led ramp-up in propylene output. We, however, raise the TP by 6% to Rs525 on lower debt and higher investment value. Retain Buy/OW stance.
Q4FY21 highlights:
Other Expenditure jumped 7% yoy/23% qoq to Rs48.5bn (14% above est). Interest rose 90% qoq to Rs4.8bn, while Other Income was also up 41% yoy/14% qoq at Rs16.3bn. There was forex gain of Rs292mn. BPCL moved to the new low tax regime from FY21 with Q4 ETR at 2.4%. Domestic sales volume grew 4% yoy, (vs. 2-6% for peers), while total volumes rose 5% to 11.8mmt. Petrol/diesel volume grew 10%/5% yoy. Kochi/Mumbai core GRM was USD1.1/USD4.0.
Refinery utilization was strong at 124% or 8.4mmt. Profits from assoc./JV were Rs4.4bn vs. Rs7.3bn loss in Q3. Shares O/S rose to 2.09bn from the treasury sales. BPCL’s FY21 EBITDA/APAT rose 116%/251% to Rs179.7bn/Rs119.2bn, driven by 49%/24% jump in reported GRMs/marketing margins. Marketing/refining volumes declined 11/17%. Interest costs fell 39%. Core EPS was Rs35.1.
Guidance:
BPCL does not intend to sell IGL and PLNG stakes. As per SEBI regulations, an open offer is required but it is working with the govt to avoid it. BPCL has signed a 15-year product supply agreement with NRL. It expects the BORL deal to conclude by 15 June (awaiting tax certificate). BORL continues to get tax benefits, and VAT deferment of Rs13- 14bn is still pending. PAT/GRM was Rs1.44bn/USD8.3 in Q4. Two PDPP units, acrylic acid and oxo-alcohol, were commissioned, while acrylate is under commissioning.
It would add USD1/bbl GRM to Kochi refinery along with petchem deltas. Current refinery utilization is 86% due to low demand. FY21 capex was Rs110.6bn (Rs30bn/Rs50bn/Rs10bn/Rs11.6bn on refining/ marketing/petchem/E&P), while the FY22 target is Rs120bn. BPCL has not taken any impairment in Mozambique; it expects violence in the country to delay it by 6-12 months.
Valuation:
We value BPCL on a SOTP basis at 6.5x blended Mar’23E EV/EBITDA, BORL at 5x and investments-upstream at a 25% hodco discount. Key risks are adverse petroleum prices/margins/currency, project delays and disinvestment uncertainties.
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