IGI Logo

Better-than-expected result; reiterate it as the preferred pick in OMCs

* BPCL reported a beat on our estimates, driven by a better-than-expected performance in the Marketing segment (volumes were down 14% QoQ). Refining throughput in 1QFY22 was aligned with demand moderation due to the second COVID wave (throughput was down 18% QoQ).

* With the easing of the lockdowns in July, demand for petroleum products such as MS/LPG has surpassed 2019 levels (+5%/+10%), while HSD demand remains subdued (-8%).

* The management stated that an increase in personal mobility due to COVID continues to drive higher demand for MS (thus aiding cracks). Demand for HSD is also seeing strong recovery in the US, coupled with the re-opening of the Chinese and Indian economies. Although, high levels of HSD inventory globally have resulted in suppressed cracks.

* SG GRM averaged higher MoM at USD2.9/bbl in July (v/s USD2/bbl in 1QFY22), the highest ever since the COVID outbreak in Feb'20. Recovery is entirely driven by higher demand for gasoline (margins at USD10.1; +USD3 MoM), while ATF/gasoil margins remain the same MoM at USD4.3/USD4.7. SG GRM is higher at around USD3.6/bbl in Aug (to date).

* With the total phasing out of the COVID lockdowns and closure of refinery complexes (est ~3mnbopd over the next 2–3 years), the refining margin would return to its long-term average (of USD5–6/bbl).

* BPCL is still working with the Government of India to protect its interest in IGL and PLNG and avoid an open offer in these subsidiaries.

* A virtual data room has been opened up since Apr’21, and the next two steps consist of a discussion with the senior management and visiting physical assets. We value BPCL at 2.3x Sep’23E P/BV; we reiterate Buy, with TP of INR615.

Better-than-expected performance from Marketing segment

* Refining throughput was in line with estimates at 6.8mmt (+33% YoY, -18% QoQ), with high sulfur crude at 62% of total throughput. Reported GRM was also in-line at USD4.1/bbl (v/s USD0.4/USD6.6 in 1Q/4QFY21).

* Marketing sales volumes were 8% higher than estimated at 9.6mmt (+28% YoY, -14% QoQ). The increase was largely seen in HSD (+25% YoY), MS (+39.7% YoY), and ATF (+115.4% YoY). The marketing margin including inventory gain came in at INR5.8/lit (v/s our est. of INR3.9; -35% YoY /-4% QoQ).

* EBITDA stood at INR33b (+79% est.; -17% YoY / -35% QoQ). Forex loss stood at INR0.5b (v/s our est. of INR1.4b). Adj. PAT stood at INR15.6b (-25% YoY).

* The company reported an extraordinary expense of INR0.8b towards the ESPS scheme. BPCL has further rationalized its employee costs (with employee strength now at 9,027, down from 11,249/ 9,100 in FY20/21). It expects employee costs to be around similar levels going forward as well.

Valuation and view – reiterate Buy

* Capex guidance for FY22 stands at INR100b (Refining: INR26b, Marketing: INR33b, Petchem: INR10b, BRPL equity investment: INR13b, and the rest in other smaller projects, including CGDs) – this is expected to be at similar levels in FY23 as well.

* Government receivables stand at just INR2.3b (with no under-recoveries from LPG and kerosene currently).

* Contribution from the PDPP plant was less than INR100m in 1QFY22; although, significant contribution is expected from FY23.

* Two units are currently being stabilized (the management expects this to take longer as they have been commissioned virtually).

* The third unit has two trains, of which one is commissioned and the other would be commissioned over the next 5–6 months.

* The management expects incremental GRM of USD1/bbl on a full-year basis if product prices remain around current levels.

* The downside risk to our call is a delay in the privatization procedure due to further lockdowns/delays in the opening up of international borders.

* The final dividend of INR58/share for FY21 would be taken up for approval by the shareholders at the AGM on 27th Sep’21. The stock trades at 1.8x FY23 PBV. Reiterate Buy.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer