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Play on privatisation

Bharat Petroleum Corporation’s (BPCL) Q1FY22 recurring EPS is down 29% YoY as hit from YoY plunge in net marketing margin exceeded gains from YoY rise in reported GRM and product inventory gain. Q1 consolidated recurring EPS is down 27% YoY (it is not really comparable as NRL boosted Q1FY21 EPS, but BPCL divested its stake in Mar’21).

Auto fuel net marketing margin is on track to be in line with our FY22E estimate of Rs2.5/l or higher. BPCL’s core GRM remains weak and diesel cracks recovery is key to GRM rising to our FY22E estimate of US$3.5/bbl. We have kept FY22E EPS and target price unchanged. BPCL is our top pick among OMCs as we are more confident of gains from privatisation than GRM recovery, on which peers’ fortunes depend more than that of BPCL. Retain BUY.

* Q1 EPS hit by plunge in net marketing margin: Standalone Q1FY22 recurring EPS is down 29% YoY, hit by 77% YoY fall in net marketing margin to Rs1.4/l, and despite 10.6x YoY rise in reported GRM to US$4.12/bbl and 8% YoY rise in estimated product inventory gain to Rs10.8bn. Excluding inventory gain/loss, Q1 standalone EPS is down 77% YoY. Consolidated Q1 recurring EPS is down 27% YoY despite share of profit of associates being up 5.5x YoY at Rs2.6bn as NRL did not contribute to consolidated EPS in Q1FY22; BPCL divested its stake in NRL in Mar’21.

* Marketing margins appear on track to be in line with FY22E estimate or higher: Rs9-11.8/l hike in domestic diesel and petrol prices in FY22-TD and fall in international prices from 6-Jul’21 peak has meant that net auto fuel marketing margin is at Rs3.28/l on 12-Aug’21 and Rs2.89/l in Q2FY22-TD vs Rs1.43/l in Q1FY22 and Rs1.90/l in FY22-TD. Net margin is estimated at Rs3.98/l on 16-Aug’21 based on international prices during 1-11 Aug’21 and at Rs4.39/l at latest international prices. If domestic and international prices remain at current levels, FY22E net margin would work out to Rs3.45/l vs our FY22E estimate of Rs2.5/l.

* Q1 core GRM estimated to be below FY22E GRM; diesel cracks recovery key to GRM rise: We believe BPCL’s Q1 reported GRM was boosted by inventory gain and core GRM was below our FY22E estimate of US$3.5/bbl. Reuters Singapore GRM is at an 8-quarter high driven by petrol cracks at 7-quarter high in Q2FY22-TD. However, diesel cracks are weak at US$5.2/bbl in FY22-TD and their rebound to pre-covid level of US$11/bbl is key to GRM recovery.

* BPCL is our preferred pick among OMCs: We keep our FY22E EPS and our target price of Rs544 (21% upside) unchanged; it assumes 56% of holding realises Rs612 (8x FY22E EV/EBITDA) in successful bidder’s open offer, and Rs459 (6x FY22E EV/EBITDA) is realised on the balance. BPCL is a play on privatisation and it going through at a similar valuation as estimated by us is key to our positive stance. Among OMCs, we prefer BPCL as we are more confident of gains from privatisation than GRM rebounding strongly, which is more crucial to stock performance of peers.

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