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GRM rise may boost gains from privatisation

Bharat Petroleum Corporation’s (BPCL) Q2FY22 standalone and consolidated EPS are down 10-12% YoY hit by fall in product inventory gain and rise in interest cost; reported GRM and marketing margin were up YoY. Auto fuel net marketing margin is estimated at Rs2.5/l in FY22-TD. Singapore GRM surged to US$7.5/bbl in Oct’21 on fall in Chinese throughput, Asian and US auto fuel inventories and very high gas prices boosting oil demand. If GRM recovery sustains, it may boost bid price in privatisation. We have raised our FY22E EPS by 27% mainly on factoring-in H1 inventory gains and FY23E EPS by 19% on upgrade in marketing margin to Rs2.5/l and merger gains to Bina refinery. Target price, now based on FY23E EBITDA, is up 16% to Rs629 (51% upside). Reiterate BUY.

* Q2FY22 EPS hit by fall in product inventory gain and surge in interest cost: Standalone and consolidated Q2FY22 recurring EPS is down 10-12% YoY, hit by 80% YoY fall in product inventory gain and 31x YoY surge in interest cost. Q2 EPS was down despite 34% YoY rise in marketing margin to Rs3.5/l and 4% YoY rise in GRM to US$6.04/bbl. Excluding inventory gain/loss, Q2 EPS is up 53% YoY.

* Marketing margins YTD & FY22E at Rs2.5/l: Net auto fuel marketing margin is at Rs2.48/l in FY22-TD vs our FY22E estimate of Rs2.5/l. To keep margins at this level, more price hikes are required, which we are confident would be made.

* Singapore GRM surge to US$7.5/bbl in Oct’21 augurs well for FY22E outlook: Reuters Singapore GRM is at a 25-month high of US$7.5/bbl in Oct’21 driven by transportation fuel cracks at 21-69 month high. BPCL’s GRM lags Singapore GRM partly due to temporary factors. We expect GRM strength to sustain in rest of FY22E. Capacity additions of 1.3m b/d, new covid waves and rebound in Chinese and US refinery utilisation are risks to strength sustaining, but a severe winter that keeps gas prices high and demand recovery can keep GRM strong even in FY23E.

* Raise FY22E-FY23E EPS and target price: We have raised our core FY22 GRM estimate to US$4/bbl from US$3.5/bbl and factored-in H1 crude and product inventory gain of ~Rs40bn including that of Bina refinery. However, we have cut our throughput and sales volume to factor-in the impact of covid in H1. The net impact is upgrade in FY22E EPS by 27%. We have raised our FY23E EPS by 19% on increase in auto fuel net marketing margin to Rs2.5/l from Rs2.25/l earlier and Bina refinery’s profit estimate to account for gain from merger with BPCL by way of saving of CST. GRM estimate remains unchanged at US$4.5/bbl. Our target price, now based on FY23E EBITDA instead of FY22E, is up 16% to Rs629 (51% upside); it assumes 56% of the holding realises Rs690 (7.5x FY22E EV/EBITDA) in successful bidder’s open offer, and Rs552 (6x FY22E EV/EBITDA) is realised on the balance. BPCL is a play on privatisation and that it is going through at a similar valuation as estimated by us is key to our positive stance. We believe gains on the privatisation may further be boosted by GRM recovery.

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