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Muted marketing inventory gains offset by lower opex

* Q1FY22 standalone EBITDA fell 17% yoy (36% qoq) to Rs33bn, 4% above our estimate. APAT declined 25% yoy (61% qoq) to Rs15.6bn, 4% below our estimates. Gross profit of Rs82.5bn was a 4% miss, offset by low opex (-16% qoq), leading to the EBITDA beat.

* BPCL’s reported GRM stood at USD4.12/bbl in Q1 (largely in line). Marketing inventory gains of Rs8bn (lower than expected) led to weak reported marketing performance. But core marketing margin of Rs5.7/kg was a 13% beat. Refining inventory was undisclosed.

* Gross debt (excl. lease liabilities) fell 18% qoq to Rs215.8bn. BPCL booked Rs13.8bn in exceptional gains in consol. accounts from the conversion of BORL to subsidiary from JV. The number of shares O/S rose to 2.13bn. Ex-date for Rs58 FY21 dividend is 16 Sep’21.

* We cut FY22E EPS by 8%, building in lower inventory gains, with slight 2%/3% increase in FY23E/24E EPS. Our TP is up 2% to Rs535 (from Rs525), rolling over to Sep’22E from Mar’22E. We keep the target EV/EBITDA unchanged at 6.5x. Retain Buy/OW stance.

Highlights: Other Expenditure rose 28% yoy/fell 13% qoq to Rs42.2bn. Employee costs fell 18% yoy/30% qoq to Rs7.39bn. Depreciation rose 14% qoq (above est.), while Other Income was down 24% yoy/72% qoq at Rs4.52bn (27% miss). Interest costs rose 2% qoq to Rs4.87bn (7% below est), while the forex loss was Rs467mn (Rs1bn est). Exceptional items recorded due to ESPS were Rs771mn. The tax rate was lower at 24.8%. Mumbai/Kochi reported GRM of USD4.4/USD3.9 per bbl. Refinery utilization was in line at 99% (6.8mmt). Domestic sales volume rose 28% yoy to 9.6mmt (vs. peers’ 17-23%). Exports fell 51% qoq to 0.3mmt. Overall marketing volume growth was 19% yoy, a 3% beat. Petrol/diesel volumes grew 40%/27% yoy (vs. 33-37%/22-23% for peers). Q1FY22 capex was Rs40bn − Rs24.2bn on BORL stake buy+others, Rs4bn on BPRL, Rs4.5bn on refining and Rs7.3bn on marketing.

Guidance: BPCL added 130 ROs in Q1. Refinery throughput was aligned to demand. Marketing volumes in Jul’21 were down 6% vs. Jul’19, with MS/LPG up 5%/10% while HSD down 8%. BPCL expects stabilization of PDPP in Q2 and ramp up thereafter. Kochi refinery will show full potential after reaching full physical levels with favorable crude differentials. FY22 capex target is Rs100bn (Rs26bn for refining, Rs9.5bn petchem, Rs33bn marketing, Rs13bn BPRL and Rs17-18bn others). BORL reported USD5.2/bbl GRM and Rs640mn of net loss in Q1. Debt was Rs70bn. CST savings could have been Rs1.5-1.6bn if merged. There was no response from SEBI on IGL-PLNG open offer and no decision has been taken yet.

Valuation: We value BPCL on a SOTP basis at 6.5x blended Sep’23E EV/EBITDA, BORL at 5x and investments at a 30% holdco discount. The Mozambique project has been valued on the latest transaction value. Key risks are adverse petroleum prices/margins/currency, project delays and disinvestment uncertainties.

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