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Lower opex drives earnings beat, Bina supports GRMs

* BPCL reported Q2FY23 SA adj. (ex-subsidy) EBITDA loss/net loss of Rs35.6bn/Rs44.6bn, better than our estimate of Rs54.2/59.6bn loss on 20% lower-than-expected opex. LPG subsidy was Rs55.8bn, while marketing inventory loss was Rs3.8bn.

* Reported GRM was USD16.8/bbl (ex-export duty), while our adj GRM is ~USD12/bbl (vs our est. of USD10.5). Implied blended marketing margin was a negative Rs3.1/kg (vs our est. of -Rs2.7). Gross debt rose 49% QoQ to Rs482.4bn, on accumulated losses.

* BPCL’s FY23 earnings visibility is low, with persisting diesel losses and a volatile GRM outlook. The Bina merger amid high GRMs has been a blessing, though. We have built this in our SA estimates, though we assume a conservative marketing margin going ahead.

* FY23E EPS is up ~90% due to the Bina merger, though FY24/25E is cut by 15%/25% on moderate GRMs. We reduce TP by 7% to Rs350 (at 5.5x Sep-24 EV/EBITDA). OMCs should fare better in H2, but BPCL is expensive at 1.5x P/B (vs IOCL’s 0.7x); retain HOLD

Highlights: Adjusted gross profit was in-line, as better refining offset the weaker marketing. Marketing inventory loss was higher than our estimate. Domestic sales volume grew by 15% YoY with a 2% beat on overall volumes. Petrol/diesel volumes were up 14/21% YoY. Refinery utilization was ~100% (in-line), while reported GRM at Mumbai/Kochi/Bina was USD10.9/18.4/24.5 per barrel, respectively. Forex loss of Rs5.9bn was lower than expected, while depreciation fell 3% QoQ to Rs15.6bn. Interest cost jumped 32% QoQ to Rs8.1bn, as debt elevated. Other Income was down 11% YoY/up 27% QoQ at Rs5.6bn (in-line). Other expenditure fell 23% QoQ to Rs55.5bn, while employee cost was also lower, by 10% at Rs5.6bn (24/18% below our estimate). Reported positive EBITDA/net loss (with LPG subsidy) was Rs20.2/3.0bn; capex stood at Rs24bn in Q2.

Guidance: BPCL’s H1FY23 capex was Rs67bn (as per PPAC), while its FY23 capex may be slightly higher than the targeted Rs100bn. Mgmt expects debt levels to ease with subsidy payout. New projects like refinery expansion and petchem are awaiting Board approval.

Valuation: We value BPCL on an SOTP basis, with investments at a 30% holdco discount. We increase our EV/EBITDA, from 5.0x to 5.5x Sep-24 earnings, matching it with that of IOCL/HPCL. We build-in BORL/Bina refinery into our SA FY23 estimates; this has resulted in a 93% upgrade to FY23E SA EPS, which stands adjusted in our SOTP valuation, though. In the current favorable scenario, Bina is highly earnings-accretive, although we have moderated our FY24/25 GRM assumption and, together with lower marketing margins, have cut our EPS estimates by 15%/25%. We maintain HOLD with revised TP of Rs350/share on expensive valuation (2x that of IOCL). The favorable macro and potential policy support, along with auto-fuel price movement, are the main monitorables. Key risks: Adverse commodity price margins, currency, polices and project issues.

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