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Outlook intact amid volatile earnings and limited volume growth

* BPCL reported GRM of USD18.5/bbl in 2QFY24, a substantial improvement from USD12.6/bbl in 1QFY24, while implied marketing margin at INR5.9/lit beat our est. of INR5.4/lit.

* Refining throughput stood at 9.4mmt (vs. 10.4mmt in 1QFY24), due to the planned maintenance shutdown at its Bina refinery. The management highlighted that GRM of the Bina refinery is higher than that of other refineries since it can process up to 90% of high Sulphur crude in its crude basket.

* Singapore GRM has declined to USD4.1/bbl in 3QFY24 TD from USD9.8/bbl in 2QFY24, which may lead to a weak refining performance in 3Q. However, we expect GRM to improve to ~USD8.5/bbl in 4QFY24 as global refining maintenance shutdowns may lead to improvement in product cracks.

* Marketing sales volume (excluding exports) came in at 12.2mmt in 2QFY24 (vs. 12.8mmt in 1QFY24). The company intends to add 1,000 retail outlets in FY24 and has already added 300 retail outlets in 1HFY24.

* The stock is trading at 1.1x FY24E P/BV, and we value it at 1.1x FY25E P/BV to arrive at our TP of INR380. Maintain Neutral.

Throughput and marketing sales volume in line

* Refining throughput was in line with our estimate at 9.4mmt (+6% YoY). Reported GRM came in lower than our estimate at USD18.5/bbl (vs. our estimate of USD20.3/bbl and USD12.6/bbl in 1QFY24).

* Marketing volumes, excluding exports, were in line with our estimate at 12.2mmt (+7% YoY). Marketing margin (inc. inv.) was higher than our est. at INR5.9/lit (INR9.3/lit in 1QFY24). Marketing inventory gain for the quarter stood at INR14.9b vs. inventory loss of INR10.7b in 1QFY24.

* As a result, EBITDA came in 7% below our est. at INR130.1b. Reported PAT was in line with our est. at INR85b.

* Debt position improved to INR225.7b at 2Q end vs. INR279.4b at 1Q end. ? For 1HFY24, BPCL posted EBITDA of INR288.2b (vs. operating loss of INR28.8b in 1HFY23) and PAT of INR190.5b (vs. net loss of INR65.7b in 1HFY23).

* Marketing sales volume, excluding exports, declined 7% YoY to 24.9mmt, with marketing margin at INR7.6/lit (vs. marketing loss of INR4.9/lit in 1HFY23).

* Refining throughput was down 6% YoY at 19.7mmt, with reported GRM at USD15.6/bbl (vs. USD22.2/bbl in 1HFY23).

* 1HFY24 EBITDA stood at 77% of our FY24 estimates, while PAT was at 87% of our FY24 estimates.

* BPCL had a cumulative negative net buffer of INR8487.4m as on 31st Mar’23 due to under-recovery on LPG cylinders. The same has been recognized as part of revenue upon its recovery in 1HFY24.

Valuation and view

* At 1.1x FY25 P/BV, we see limited downside from current levels. However, with minimal volume growth in the next two years and given earnings volatility in the marketing division, we maintain our Neutral rating with a TP of INR380.

* We expect refining margins to sustain close to mid-cycle levels and they are unlikely to reach extremities, which can be a near-term positive for OMCs.

* Retail price cuts due to upcoming elections and/or a surge in crude oil prices due to active quota management by OPEC+ remain key risks to our call. However, we highlight that even with crude at USD85/bbl and MS/HSD cracks at long-term average levels, BPCL is expected to earn marketing margin of INR8.9/INR6.7 per liter on MS/HSD.

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