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GRM remains strong; net debt on the rise

* Reported GRM, at USD15.3/bbl, came in lower than our estimate, while the implied marketing margin fell 51% YoY and 29% QoQ to INR2.9/liter. Refining throughput (up 2% QoQ) was in line, while marketing sales volumes (up 18%) were above our estimate.

* Singapore GRM has been at a record high of USD22.6/bbl in May’22 from a loss of USD1.5/bbl in May’20 (during the COVID-19 pandemic). It stood at USD2.1/USD18.6 per bbl in May’21/Apr’22. However, we believe OMCs are staring at losses of INR8.8/INR12.9 per liter on petrol/diesel at prevailing benchmark prices.

* Factoring in the aforementioned, we raise our FY23 EBITDA/EPS estimate by 22%/33%, due to an upward revision in our GRM assumption for 1QFY23 (keeping our FY24 EBITDA/EPS estimate unchanged).

* In FY22, standalone net debt stood at INR233b (v/s INR142b in FY21), while consolidated debt came in at INR537b. The company has announced a final dividend of INR6/share.

* BPCL’s divestment has been called off, and news reports suggest that there may be a rethink of its divestment strategy. The stock is trading at 1.1x FY24E P/BV. We value the stock at 1.2x FY24E P/BV to arrive at our TP of INR360.

Reported GRM lower than our estimate; beat on absolute EBITDA

* Refining throughput was in line at 8.1mmt (down 3% YoY, but up 2% QoQ). Reported GRM came in lower than our estimate at USD15.3/bbl (est. USD19.8) v/s USD9.7 in 3QFY22.

* Marketing volumes were higher than our estimate at 11.8mmt (up 6% each YoY and QoQ). Marketing margin (including investment) was lower at INR2.9/liter (v/s INR4.1/INR6 per liter in 3QFY22/4QFY21).  Resultant EBITDA was 34% above our estimate at INR44.5b (down 12% YoY, but up 4% QoQ). Reported PAT fell 82% YoY and 13% QoQ to INR21.3b.

* In FY22, EBITDA was flat YoY at INR165b, with adjusted PAT down 30% YoY to INR88.5b. Marketing sales volumes rose 10% YoY to 42.5mmt, with marketing margin at INR4.7/liter (v/s INR6.9/liter in FY21). Refining throughput grew 14% YoY to 30.1mmt, with reported GRM at USD8.8/bbl (v/s USD3.8 in FY21).

* BPCL recognized a provision of INR4b for CWIP in FY22. It also announced a final dividend of INR6 per share.

Valuation and view – Reiterate Neutral

* Capex guidance for FY23 stands at INR100b (refining: INR13b, marketing: INR23b, petchem: INR26b, equity investment in JV subsidiary: INR18b, and the remainder in other smaller projects, including CGDs) and is expected to remain at similar levels in FY24.

* A further improvement in GRM and marketing margin returning to normalized levels bodes well for the stock. Any delay in the privatization process or sustained lower marketing margin poses a downside risk to our call. BPCL trades at 1.1x FY24E P/BV. We value the stock at 1.2x FY24E P/BV to arrive at our TP of INR360. We reiterate our Neutral rating.

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