BPCL: Stellar performance, strong outlook

28 Jul 2023 , 11:28 AM

Recommendation: Buy; Target price: Rs 450

BPCL reported Rs106bn PAT in Q1FY24 (vs loss YoY) that came in ahead of forecasts, despite Rs2.4bn provision towards the stranded Mozambique project. The record-high earnings were on the back of GRM beat (Russian oil) + above-normal marketing margins. Timing/quantum of auto fuel price cut remains uncertain, for which forecasting near-term earnings is tricky. The 76% upgrade to FY24 earnings may see further upsides, if prices are unchanged. As such, the stock remains cheap even in a normalised operating environment, as reflected in FY25 forecasts. Maintain BUY. 

Beats estimates: 

BPCL’s Q1 standalone PAT of Rs106bn (loss YoY) was ahead of estimates, even after a one-off provision of Rs2.4bn towards the stranded Mozambique LNG project (10% stake). The company processed 7% more oil YoY at its refineries (utilisation 117%), and reported blended GRM of US$12.6/bbl vs US$27.5/bbl YoY; Mumbai/Kochi/Bina reported GRMs of US$6.5/15.5/18.8/bbl (Russian oil processing – quantum undisclosed), leading to OPF vs SG benchmark of US$4/bbl. Kochi’s petchem unit has improved GRMs by ~0.5/bbl. Auto fuels led the 7% YoY growth in marketing volumes at a time when margins were above-normal, despite inventory loss of Rs10.7bn (Rs3.7bn YoY). 

Fuel price cuts =f(oil prices): 

During the earnings call hosted by IIFL, VRK Gupta, Director Finance, BPCL explained: 1) Auto fuel spreads are strong however, the industry has not yet fully recouped FY23 losses; decision on price cuts is likely when oil prices stabilise. 2) Outlook on product consumption is healthy, led by economic activity. 3) Its refineries can process up to 30% Russian oil, provided deep discounts hold steady. 4) The rights issue of Rs180bn is to part finance capex of Rs1.4trn (upstream + green energy + petchem + CGD etc.); FY24 capex is ~Rs100bn and would increase in FY25/26. 5) Pricing / timing of rights issue etc., is yet not decided. 6) Provision towards Mozambique project may get reversed if construction activities resume. 

Upgrade earnings; further upside exists: 

FY24 earnings are a bit tricky to estimate, as the timing/quantum of cut in auto fuel prices is uncertain; runaway increase in oil will imply inventory gains, but eat up in auto fuel margins; so the 76% upgrade to FY24 PAT has less relevance from valuation standpoint. However, the stock is cheap even in a normalised operating environment which analysts of IIFL Capital Services reflect in FY25 earnings; maintain BUY.