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Moving from strength to strength

Bharat Petroleum’s refining and marketing divisions make significant contributions to its EBITDA. We expect the FY26 contribution for refining at 50%, marketing 47%, and pipeline 3%, a judiciously balanced play with respect to refining and marketing.

GRM environment - super normal, earnings supportive: Lower global gasoil stocks and robust demand for petroleum products are expected to sustain, retaining key product cracks higher. The company sources over 35% of its crude requirements from Russia at a discount, thereby boosting GRMs. The benchmark Singapore GRM and the company’s GRM are both trending higher than their last 10-year averages, supported by stronger demand, reduced supply, and lower stocks. We assume FY25 and FY26 GRMs of respectively $8.1 and $7.3/bbl vs the last 7-year average reported GRM of $7.6 and the Singapore GRM of $5.4.

Improved Marketing Outlook: We estimate the marketing division to fetch ~47% to Bharat Petroleum’s FY26 EBITDA. In the past few months, retail fuel margins have recovered from weaker numbers; fall in crude and product prices were not passed on as the RSP is unchanged, this factor clearly weighs on the outlook for the marketing division. We expect gross marketing margins to be at par with past averages in a base case scenario, at the pre-deregulated of Rs2.7/ltr for both diesel and petrol.

Dividend bonanza: We believe that BPCL will report its highest ever annual profitability in FY24 following higher GRMs and an improved marketing performance on a crude price drop. We reckon BPCL could declare a dividend of Rs45/share (yield of 10% at CMP) in FY24; it has already declared an interim dividend of Rs 21/share (yield of 4.7% at CMP).

Mozambique prospects: Management seems optimistic with the developments, and operations are likely to commence in few quarters. Once the force majeure ends, and post reassessing, project costs could increase.

Growing Renewables portfolio: During Q2FY24, BPCL installed 18MW solar plant, taking total renewable energy capacity to 64MW; another 190 MW is under progress at an outlay of Rs 14bn. The aim to touch 1GW in the short term while the long-term target is to achieve 2GW at an outlay of Rs 26bn.

Petchem segment: Petchem complex (PDPP) in Kochi refinery had utilization of ~73% in Q2FY24 and contributed USD 0.5/bbl. BPCL is adding a new petchem capacity which is under progress at Bina refinery; it will have 2.2mmt capacity with products – HDPE, LDPE and Polypropylene and Naphtha, all key inputs used as a feedstock despite it being a dual fuel feed plant. BPCL expects this segment to add strong cashflows and diversify potential risks emerging in other segments.

Outlook: BPCL has Rs20.2bn and Rs23.5bn sensitivity to a change of Rs0.5/ltr and USD1/bbl, respectively. An expectation of higher dividend in FY24 (10% yield), 4.9%/4.4% FY25e/26e would be key for shareholders, compensating lower dividend of FY23. The BV/share for FY25e/26e is at Rs 352/380 and the debt: equity is least amongst OMCs at 0.4/0.3/0.3x for FY24e/25e/26e. At CMP, the stock trades at 5.4x/6.0x FY25e/26e EV/EBITDA and 1.3x/1.2x P/BV (excl. investments, trades at 4.3x/4.8x FY25e/26e EV/EBITDA and 1.0x/0.9x P/BV). We initiate coverage with a BUY rating and a target price of Rs618 valuing it on a sumof-parts basis (core business at 6.5x EV/EBITDA and investments at Rs115).

Key Risks: Weaker GRM environment, change in crude prices, inventory losses, adverse government policy of subsidy-sharing, and weak marketing margins.

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