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Divestment to drive stock performance...

Bharat Petroleum Corporation (BPCL) reported Q4FY21 results that were better than our estimates on the profitability front on account of inventory and exceptional gains. Revenues increased 14.1% QoQ to | 98755.6 crore, against our estimates of | 100818 crore. Marketing sales at 11.2 MMT were marginally better than estimated. Reported GRMs at US$6.6/bbl (our estimate: US$4/bbl) were lifted by inventory gain of US$4.2/bbl.

Subsequently, EBITDA at | 5057.9 crore (up 17.5% QoQ) was higher than our estimate of | 3006.1 crore. The company reported an exceptional gain of | 6993 crore. Consequently, reported PAT was at | 11940.1 crore, up 329.9% QoQ (our estimate: | 1881.8 crore).

Inventory gains supports operational performance

Crude oil prices sharply increased during the quarter on expectations of a global demand recovery. Average crude oil prices increased by US$16.1/bbl to US$60.7/bbl while Brent crude oil prices on a closing basis jumped US$11.2/bbl QoQ to US$62.4/bbl. BPCL reported marketing inventory gain of | 1829 crore. However, core marketing margins reduced QoQ as higher crude oil costs were not fully passed on to customers.

In terms of marketing sales, BPCL reported growth of 4.1% YoY to 11.2 MMT, marginally above our estimates. Going forward, we expect marketing sales volume at 42.7 MMT, 46.8 MMT in FY22E, FY23E, respectively, taking into account partial closure of activities in Q1FY22E. Crude throughput in Q4FY21 was flat YoY at 8.4 MMT, above our estimates. Going forward, we estimate throughput of 29.7 MMT, 32.6 MMT for FY22E, FY23E, respectively.

Core GRM improvement important

Reported GRMs were at US$6.6/bbl, higher than our estimate of US$4/bbl. The company’s core GRMs were at US$2.5/bbl while inventory gain was at US$4.2/bbl. Benchmark Singapore GRMs have improved QoQ in the current quarter (Q1FY22-TD) and further recovery in global demand will be important for improvement in product cracks (mainly diesel). We estimate GRM at US$3.9/bbl and US$4.5/bbl for FY22E and FY23E, respectively.

Valuation & Outlook

While marketing sales reached near normal level in Q4FY21, second wave of Covid-19 and subsequent movement restrictions led to reduction in fuel demand. This has affected capacity utilisation as well that reduced up to 86- 87% in May. Improvement in global product cracks and further recovery in fuel demand will be important for BPCL's profitability in the near term.

The progress on divestment, response by bidders and subsequent valuation ascertained to the company will be a key monitorable and will drive stock price. We roll over valuations to FY23E and maintain HOLD recommendation on the stock with a target price of | 495 based on average of P/BV multiple and P/E multiple at | 495/share each (earlier TP: | 350).

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