Maintain ADD on Bharat Petroleum Corporation - High marketing margin leads the way - HDFC Securities

Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

We maintain ADD on Bharat Petroleum (BPCL) with a price target of INR 445, owing to an expected recovery in demand for petroleum products and, subsequently, refining margins. 1Q reported EBITDA and APAT were 28% and 41% below estimates due to (1) 22% higher-than-anticipated RMC at INR 306bn, (2) 12% lower domestic marketing throughput at 7.5mmt, and (3) 92% lower reported GRM at USD 0.4/bbl, partly offset by 23% higher marketing margin of INR 7/ltr. Reported EBITDA came to INR 39bn (vs. EBITDA of INR 22bn YoY and an operating loss of INR 17bn QoQ). Crude inventory losses were INR 4bn (HSIE gain of INR 10bn) and product inventory gains were INR 10bn (HSIE INR 28bn). Forex loss stood at INR 570mn (HSIE 0). Adjusting for these, core EBITDA stood at INR 34bn (HSIE INR 16bn), +31/-23% YoY/QoQ.

Refining: Crude throughput in 1Q stood at 5.1mmt (-31/-39% YoY and QoQ). Utilisation at the Kochi/Mumbai refinery stood at 88/63%, given lower demand amid the lockdown, leading to lower throughput. Core GRM stood at USD 1.9/bbl vs. USD 3.7/7.3 YoY/QoQ. GRM declined sequentially with a fall in naphtha, gas oil, gasoline and jet kero cracks. We expect crude throughput of 28.5/33.1mmt and core GRM of USD 3.6/4.1 per bbl in FY21/22E.

Marketing: Domestic marketing sales volume was 7.5mmt (-32/-30% YoY/QoQ). BPCL's market share declined vis-à-vis India's consumption of petroleum products (-26/-23% YoY/QoQ), given its strong presence in urban areas that were more severely affected by the COVID-19 pandemic. Blended gross margin stood at INR 6.9/lit (+59/45% YoY/QoQ), but these do not seem sustainable in the near term. We expect blended gross margins to correct to INR ~4.5/4.6 per litre in FY21/22E.

Call takeaways: (1) The execution of Propylene Derivatives Petrochemical Project (PDPP) at Kochi has been delayed further to 2HFY21 (earlier, 1QFY21) as the licensing process has been pushed forward, given COVID-19. (2) The FY21 Capex guidance has been revised from INR 125bn to INR 80-85bn, broken into refining INR 23bn, marketing INR 35bn, petchem INR 8bn, exploration INR 1bn. (3) Divestment process is on track and would conclude by Mar-21. Barring its stake in NRL, stakes in PLNG/IGL/OIL would stay intact. (4) Utilisation at Kochi and Mumbai refineries have normalised in August as India's demand for petroleum products is back to ~90%.

Sum of the total parts-based valuation: Our price target comes to INR 445/sh (6.0x Mar-22E EV/e for the standalone refining and marketing businesses, 6.5x Mar-22E EV/e for the pipeline business, and INR 132/sh for other investments). The stock is currently trading at 6.3x on FY22E EPS.

Shares of BHARAT PETROLEUM CORPORATION LTD. was last trading in BSE at Rs.407.85 as compared to the previous close of Rs. 413.25. The total number of shares traded during the day was 417284 in over 8192 trades.

The stock hit an intraday high of Rs. 418 and intraday low of 403.3. The net turnover during the day was Rs. 170359237.

Source : Equity Bulls

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