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One-time LPG grant reduces losses…

About the stock: Bharat Petroleum Corporation (BPCL) is a public sector refining & marketing company.

* BPCL operates more than 19000 retail outlets across the country

* Petrol & diesel together constitute 63% of marketing sales in FY22

Q2FY23 Results: BPCL reported higher-than-expected earnings in Q2FY23.

* Revenue was up 26% YoY (down 7.3% QoQ) to | 128332.7 crore (our estimate: | 113206.7 crore)

* GRM was above our estimates at US$16.8/bbl (our estimate: US$5.1/bbl). The company received a one-time grant of | 5582 crore for under-recoveries on sale of domestic LPG. EBITDA was | 1434 crore against EBITDA loss of | 5865 crore in Q1FY23 (estimated EBITDA loss: | 6493 crore)

* Net loss was at | 304.2 crore in Q2FY23 (estimated loss: | 5755.1 crore)

What should investors do? BPCL’s GRM declined from elevated levels seen in Q1FY23. The company has not passed on higher crude oil costs to customers while weaker marketing profitability is likely to impact earnings in the near term.

* We maintain our HOLD rating on the stock

Target Price and Valuation: We value BPCL at | 330 i.e. average of P/BV multiple: | 330/share and P/E multiple: | 330/share.

Key triggers for future price performance:

* Stability in global refining product cracks (mainly diesel)

* Passing on higher crude oil costs to customers

* Consistent dividend payout

Alternate Stock Idea: Apart from BPCL, in our oil & gas coverage we also like Gail.

* Gail is India’s leading gas transmission company, which is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value

* It operates a natural gas pipeline network of 14500 km as of end of FY22

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