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Retail margin strong

Bharat Petroleum Corporation’s (BPCL IN) stock price has corrected 16% in the past three months and underperformed benchmark Nifty Index (down only 5%), due to weakening of the INR, LPG losses and increased sanctions on import of discounted Russian crude. However, we foresee integrated margin (EBITDA per unit of refining and marketing volume) for oil marketing companies (OMCs) to remain at the highest-ever level, given that crude price is

Q3 PAT up 37% YoY on strong fuel retail margin: BPCL’s Q3FY25 PAT was INR 46.5bn (Elara: INR 62.5bn), up 37% YoY & 94% QoQ. Earnings growth was driven by strong fuel retail margin, which offset cumulative LPG, forex and marketing inventory losses of INR 42bn. Adjusted for under-recovery on LPG, PAT stood at INR 69.9bn (up 106% YoY).

Integrated margin up 21% YoY, validating that OMCs will be allowed to earn higher retail margin at low crude oil price: BPCL’s integrated margin in Q3 was INR 3,263/tonne, 11% higher than FY21-24 average (up 21% YoY and 66% QoQ) due to strong retail fuel margin. This validated that OMCs would be allowed to earn above-historical integrated margin.

Strong retail margin offset weak GRM and forex/LPG/inventory losses: As per our calculations, driven by falling crude oil prices, retail gasoline margin in Q3FY25 was at INR 12.8/liter from INR 7.8/liter in Q3FY24, and diesel margin was at INR 9.3/liter versus INR 0.4/liter in Q3FY24. Marketing sales volume increased 4% YoY.

YoY drop in refining margin led by weak global demand and rising capacity: In Q3, reported GRM was USD 5.6/bbl (Elara: USD 5.6bbl) versus USD 13.3/bbl in Q3FY24. Product cracks of key products (gasoil, gasoline and jet fuel) fell 15-38% YoY on weak China demand and record high refineries run in the US. In the next 1-2 quarters, expect positive outlook for GRM with the onset of Chinese Spring and Ramadan festivals, and travel boost (on Chinese New Year and Maha Kumbh in India). But post H1FY26, expect GRM to be muted due to large refining capacity addition at 1.6mmbpd globally in CY25.

Reiterate our positive view; integrated margins robust- Maintain Buy: As per our estimates, BPCL would have to earn at least INR 3,250/tonne integrated margin to fund its aggressive capex and double profit in the next five years. This was validated in Q3FY25 and whenever crude oil prices were USD 80/bbl. We trim FY26E/27E EPS 6% each on lower GRM at USD 3.9/4.6 per bbl (from USD 6.3/6.0 per bbl). We expect diesel margin at INR 8.0-8.5/liter in FY256E and FY27E. We thus pare TP to INR 354 (from INR 386) on lower FY26E/27E EPS. We value BPCL on FY26E P/B, assuming FY29E BVPS at INR 293, 14.9% ROE, 11.3% cost of equity and 4% long-term growth.

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